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S&P's Stovall: Here’s why 2014 is going to be a whole lot rockier

At a time of year when so many investors are focusing on what the first days or month of trading will imply for the rest of year, at least one strategist is taking a more macro view on the markets and is pinning his work on to something that’s far removed from fundamentals.

As Sam Stovall, chief equity strategist at S&P Capital IQ, explains in the attached video, the biggest source of turbulence in 2014 might be the fact that it’s a mid-term election year.

“This mid-term election year could end up being similar to prior mid-term election years and therefore have an increased amount of volatility (^VIX),” Stovall says, adding that nearly 40% of all market declines in excess of 5% have occurred during mid-term election years.

Add in the fact that we’ve now gone more than 27 months since the last correction (versus an average span between pullbacks of just 18 months), and Stovall says the odds of increased turbulence compared to last year start to build up.

“I would tend to say that the market is headed for (several declines) of at least 5%, if not ten to twenty percent, sometime this year,” he predicts.

As much as the mid-term elections are stoking his concern, Stovall thinks Washington will actually be far less worrisome this year.

”I would tend to say that Congress is going to surprise us and play nice and actually come to some sort of an agreement even before the deadlines,” he says.

While the first deadline to “play nice” so to speak, is just two weeks away, Stovall says history shows that the 2nd and 3rd quarters of 2014 would likely be “the weakest six-month stretch of the entire 16 quarter presidential cycle.” As such, he thinks this will be a year to considering revisiting the old (but recently broken) ‘sell in May and go away’ theory.
Ultimately, Stovall says, preparing for a coming storm of this sort is difficult and unpredictable and reminds investors that sell-offs are typically triggered by under-appreciated or unexpected events. Even so, he is advising extra caution.

“I would be careful of the 2nd and 3rd quarter, or that ‘sell in may’ period for the coming year,” he says.

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