As we enter the seasonally weakest time of a year for the stock market, it may be a good time for some perspective.
In the past, many corrections have begun in second half of the third calendar quarter. Mid-Term election years are especially susceptible to uncertainties surrounding elections.
This past week Ned Davis Research published a research table that shows the biggest corrections which have occurred in the second half of the year during mid-term years. The chart illustrates how international catalysts can, and have, impacted the S&P 500 returns.
It certainly has not happened during every single mid term election year, but going back to 1946, it does show that there is certainly a possibility to see pull backs.
We certainly do not see a recession being a likely outcome in the next 4 months, but there is no shortage of risks on the domestic and international front, the health of the stock market, economic cycles and geopolitics. In addition, the headline risk dominates market directions on many days.
The first half of the year was a challenge with the correction which began late January. The corporate earnings this year have been very good overall for domestic companies and that is a positive. On the back of the tax cuts that took effect this year, corporations have continued to prosper overall.
However, there is still evidence that we are vulnerable to outside catalysts, including trade-wars, political unrest in the US and abroad, or something yet to reveal itself. This should all be viewed in context of a broad expansion in the markets.
The issue is that the market does not operate in a vacuum. The internal and external events combine to create the environment that end up contributing to the investor psyche.
However, lest I leave you with the feeling that the inevitable is about to happen, here is why you might not want to take that and run for the exits.
The second year of the average presidency tends to have the most pronounced period of market struggle and towards the mid-term elections tends to be the turning point. From that point through much of the 3rd year of a presidency, greater market returns tend to be observed. If we look at a chart of the Dow Jones Industrial Average’s average returns for all presidential cycles going back to 1900, we can see that beginning sometime around the mid-term elections through the 3rd year of the average Presidential term, the index has its best performance. Here is what that chart looks like superimposed on 2018 going forward to 2022.
I bring these topics up to really help you be prepared this fall as we enter the hot and heavy portion of the mid-term election cycle. Knowing potential outcomes can be helpful for investors to interpret the current headlines considering history, instead of getting caught up in the emotions of the current topics that may or may not develop into crisis.
We probably all agree that 2018 has brought volatility back into focus. It may have come back, but this doesn’t mean that we cannot navigate through these times and still possibly make financial progress!
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