Market Behavior

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I always pay attention when the market acts in a way that isn’t consistent with past historical trends or current news. An example of that is the historically strong 3rd year of the presidential cycle. The 3rd year of a presidential cycle has shown the highest stock market returns over any other year of the presidential cycle by a wide margin. That’s no surprise to most investors, as it’s been heavily promoted over the various financial mediums.

However, when the stock market fails to make a new high in the 3rd year of a presidential cycle during the second quarter of the year (specifically April-May), the average returns of the market are double digit losses in those years.

In other words, when returns are expected to be robust, but the market acts in a way that is not consistent with that trend, it has resulted in fairly substantial losses. It’s one reason I mentioned that I would be paying close attention to the stock market action at the end of March and into the April timeframe.

The long-term trend lines of equities are starting to face their stiffest test since October of last year. The S&P 500 is seeing support around the 2050 price level and even stronger support around the 2000 price level. I wouldn’t be too concerned about a larger market pullback until the 2000 price range is pierced to the downside and holds below that level for a couple days.

Until then we’ll probably see more counter trend trading as equity yields continue to exceed the ultra-low treasury yields. As long as that picture continues to be painted, investors will accept the higher risk that current equity valuations carry (along with the higher dividend rates) provided earnings don’t fall too drastically.

The difficult investing environment continues to test the capabilities of professional money managers to garner alpha returns. Investors poured money into Energy stocks and European stocks in Q1 trying to get ahead of the trade. I am more cautious on the energy side as it doesn’t appear prices have capitulated yet, so I’m remaining patient. Investors are also shifting funds from large-cap to small and mid-cap stocks due to the strong dollar which is hurting the profit margins of U.S. companies with large international exposure.

This will lead to some great investing opportunities; it’s just a matter of time.

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