Last Week's Stumble Could Mean More Than You Think... But Not For The Reason You Think

Posted by jbrumley on August 5, 2023 9:35 PM

Are you a believer in calendar-based tendencies? How about investors' ever-evolving presumptions about a (any) particular U.S. President? If the answer to either question is yes, keep reading. You're about to get some eye-opening, less-than-bullish information.

Beginning with the end in mind, the next three and a half months could be anemic, sideways ones for the stock market. Regardless of the economic backdrop and the market's long-term direction, mid-July through mid-November are typically losers -- on a net basis. This reality makes last week's loss something of a red flag, as it could mark the beginning of this wave of weakness.

The chart below tells the tale. Based on the average four year span of a Presidential term, the S&P should already be stalling out here in the latter half of the third year. This is the case whether the market is bullish, or bearish, or overall. It never does well during this four month stretch.

And it's not like this particular Presidential term is off of its usual path. Although the S&P 500 bolted out of the gate back in 2021, it was reeled in back to its long-term average by last year's bear market. The gain since October of last year is in-line with the average. The rally since early July carried the index above its long-term average.

And there's no scenario where this year will be a likely exception to the norm... even though the S&P 500 is trailing its average bullish Presidential term's performance.

There is some good news here. That is, the market typically doesn't get hammered here. It just drifts a little lower before going into recovery made in November, kicking off what's usually a bullish fourth year of a Presidential term. The S&P 500's average gain in this fourth year is 7%. It's a hefty 14% when there's a bull market underway.

Nevertheless, this tendency makes a lot of sense out of last week's loss. Without even knowing it, traders could be looking for a reason to lock in recent gains and sit on the sidelines for a while. Given that the media is led by the market and investor rhetoric rather than leading it, headlines are giving traders exactly what they subconsciously wanted at this time.

You know it better as a "self-fulfilling prophecy."

Just don't dismiss last week's setback as mere volatility. It may well be a hint that traders are ready do what they usually do at this time.