With the Republican National Convention underway, the Democratic Convention next week, and less than 70 days until Americans take to the polls, typical election year trends suggest we could be nearing another market downturn. So far this year, the S&P 500 is up 12% and sitting a few points below the 2012 closing high of 1419.
But according to Bespoke Investment Group, a short-term pullback is looming. The kings of data mining have tracked the S&P 500's election year performance since 1928. They're focusing simply on past performance to gauge how the market will move through year-end.
"You don't take this stuff as gospel, but you look for patterns and you can use them as a guide for the market," says Bespoke co-founder Paul Hickey. "This year the market has been following its typical election year pattern, with the peaks and troughs almost to a T."
Bespoke's chart below maps out just how uncanny this year's market moves line up against the historical pattern of an election year.
"Based on that pattern, you see a rally through the end of the summer...and then from Labor Day to Columbus Day you tend to see a pullback in the market," says Hickey.
During election years since 1928, the S&P 500 has dropped an average 1.95% during the period between Labor Day to Columbus Day, according to Bespoke data. For all years since 1928, the S&P averages a 0.63% drop during the same period.
"You can foresee this pattern holding up because once we get into September it's going to be the election in full gear, and you're going to see talk out of Europe, those leaders are back from vacation," Hickey explains of the near-term bearish catalysts.
But after one last sell-off, the trend turns positive into year-end. In a recent Bespoke note they say, "if the market can do half as well as it has done in the final four months of past election years, investors will have a smile on their faces when 2013 rolls around!"
Get ready for the gloves to come off in the U.S. election and polish up on your favorite European acronyms and mash-up phrases likes, EFSF, ESM, ECB, Grexit, Spailout, y mas. If history is your guide, you might consider hanging out on the sidelines before getting back in for a fourth quarter rally.
Is this market ready for a pullback? Let us know what you think on our Facebook page.