When it comes to the stock market (^GSPC, ^DJI), the last few years have been murder on conventional wisdom. There hasn’t been the “traditional” annual five percent correction in three years, the old “sell in May and go away” trope was a disaster, and those who got scared out of stocks by the Hindenburg Omen have seen huge potential profits go up in smoke.
Jeff Kleintop of LPL Financial is well aware of the limitations of using market history to predict the future. Nonetheless in the attached clip Kleintop explains that unusually high levels of market volatility have accompanied the second year of the presidential cycle.
“This is the one that actually seems to work,” says Kleintop of what he calls The Year-Two Curse. “Nine of the last 13 presidential cycles in year two we’ve seen a big peak to trough decline during that year.” Since 1960 there’s been a 70% chance of losses during the second and third quarters of year two of a presidential term. That’s about double the chances of a drop in other quarters.
What’s it mean? Kleintop isn’t ready to attribute it to mid-term elections or specific legislative processes. It’s simply something that has happened with statistically unlikely regularity. This year the most likely catalyst would be some sort of economic volatility as the recovery continues to inch along or some other unknown variable.
Since 2009 rally began, the market and investors seem to be seeking almost any reason to at the very least digest the monster gains. Kleintop isn’t willing to bet the ranch on impending doom, but he will go so far as to suggest the best dip buying strategy this year might be 10, 15 or even 20% lower than where the market stands today.
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