Time for a very quick check in on historical equity related presidential cycle rhythm. Why? The following chart is self explanatory and important to at least consider right now. IF the presidential cycle period specific rhythm is to be important at all in our current circumstances, we're getting very close to when that cycle will start kicking in. Before taking even one step further, just how in heavens could anyone even give this a second thought with what is occurring in terms of the macro credit cycle and global economic fundamentals of the moment? Don't we all have much bigger things to worry about, assess and focus upon than historic tea leaves such as the presidential cycle? You bet. But in the same breath, as we should all be aware, a good chunk of the stimulus money has been slated to be spent in 2011. You can be rest assure this is not by coincidence. Additionally, as I have suggested for some time now, I still believe the Fed will be back in the stimulus game before long on the home front. They will print again, but in some form or another I think it's a very good bet they too will act to reinforce fiscal stimulus still on the table and slated for presidential year numero tres. The mess in the Gulf and what is occurring in the Euro zone at worst means a Fed Funds rate hugging zero for probably longer than we think. Although I personally have no right to say this and do not want to turn this discussion into political commentary, if you don't think politicians will do whatever it takes to get reelected without regard for longer term consequences of their actions either economically or socially, you are living on another planet. I put absolutely nothing past the cast of characters in DC, present or former. Anything goes when it comes to political self-preservation. Moreover, have a quick look at the following chart. I've marked where we stand right now in early May as per the average rhythm of the cycle over the last half century.
You can see that as a half century average, the presidential cycle actually coincides very well in the second year with the whole "sell in May and go away" calendar based seasonal rhythm of equity prices. The average experience of the second year in the presidential cycle has the equity markets peaking in May and bottoming in October, exactly in sync with the fabled sell in May calendar rhythm. We know that following the sell in May strategy would have been a disasterous trading rule last year for very obvious reasons, but will it be so in this? We'll see, its a tough call with the sovereign debt issues at hand and what we know will be the responses of global central bankers. So far the sell in May part of the equation was right on the money, but we’ll have to see you it all unfolds amidst the meaningful volatility of the moment.
Let's start with a quick look back. The first table below documents S&P price only performance in the May through September period of the second year of the presidential cycle over the last half century. Also included is the October through year end price only performance numbers. On average the May through September periods paralleling the second year presidential cycle rhythm with which we are now living through have been poor, but that is really driven largely by four very poor period specific results. The October through December rhythm of price strength is much more consistent over the years, with really only one meaningfully down period result across time. Again, this is simply an exercise in looking ahead and contemplating results near the current year end and into the third year of the cycle that will be 2011.
As per both the message of history and current events shaping financial market outcomes now, could we face a rough patch through summer ending in a run higher as the year concludes? For now it’s rally time, but given the volatility as of late, nothing should be a surprise. The presidential cycle suggests as much, but we'll have to benchmark as we move ahead. I could give you plenty of reasons why the markets are at risk really based the simple fundamentals that sure seem to be playing out right before our eyes regarding the grand super cycle in global credit markets (problems migrating from the financial sector to the household sector, and ultimately to the sovereign debt realm), but I as well as you need to force ourselves to remain open to and at least contemplate all possible outcomes. Below are the outcomes of history.
Again, what you see above in terms of average performance in the second year presidential cycle rhythm in equity prices is a match for the sell in May and go away calendar based seasonal rhythm so well known. Combine that with historically unprecedented liquidity and to a very large degree global central bank moral hazard, and we simply need to be assessing and assigning probabilities to any and all outcomes.
Historical results of equity performance in the third year of the cycle itself are completely consistent across all time frames. Over the last half century plus, there is not one negative performance result for the Dow in any third year of a presidential cycle. Not one. This is exactly why I am bringing this up now and suggesting we all contemplate and benchmark what may lie ahead, all with the backdrop thinking that political self preservation is one of the strongest motivational traits of which I know.
Is history an iron clad guarantee? Of course not. Are the fundamental issues faced not only domestically, but truly globally generational in nature and magnitude? I think so. But that suggests that despite historic fiscal and monetary responses to these issues already delivered by governments and central banks, there is no turning back at this point. They have gone all in and will continue to do so as there simply is no other alternative. As melodramatic as this may sound, I believe the ultimate reality of forward financial market outcomes all come down to the weight and movement of global private capital both versus and relative to the capital and liquidity governments and central banks can create and position in the global financial system at any point in time. That's the tension, and ebb and flow we can only hope to anticipate correctly. Part of that anticipation is being aware of the presidential cycle that lies dead ahead.
Although I’m really talking to myself, I believe it’s a time to remain very flexible and wedded to neither the bull nor bear side of the equation for now. Digging in directionally could be a very costly mistake near term. Volatility appears to be the constant of the moment. This too shall pass… but not yet.
