In December of last year, Jeffrey Hirsch, Editor of Stock Trader's Almanac and the Almanac Investor newsletter, told our listeners that 2016 may turn out to be a difficult year for investors, citing a tendency for stocks to see double-digit losses during an election year at the end of a President's second term in office.
The 8th Year Presidential Cycle, as it is commonly referred to, shows a tendency for stocks to decline immediately in the first couple months, rally into April, and then further decline heading into the election and the remainder of that 8th year.
So far, both the S&P 500 and the Dow Jones Industrial Average have followed the pattern quite closely. If the pattern continues, it shows that US stocks should be in the process of forming a peak right now with double-digit losses by year-end.
Here's an excerpt of what Jeff had to say on our podcast (airing Friday) about the charts above in addition to his longer-term outlook:
"The caveat with this is the number of statistical data points and examples for this eighth year, which is smaller than we'd normally like. There's only half a dozen previous times where we have an eighth year of a term where a sitting President is in office and not running and not resigned and not assassinated and has not died in office and that kind of thing. So, it's a small sampling but we do see this uncertainty and vacancy of the White House creating trouble for the stock market. Five out of the last six election years with losses greater than 5% were all in this eighth year of the Presidential cycle...
If you look at the chart that we've just done and updated, you can see that the current year...has come up a bit higher...but the trend and the shape of the market this year is very similar to the composites. So, double-digit losses for this year is one of the possibilities. It doesn't seem as likely, however, though I do think that we'll have a downdraft over the next several months in the May-June area and then August-September tend to be trouble spots for the market, especially leading up to a potentially contested or brokered Republican convention...
Looking out further out, I'm expecting more of a garden-variety bear market of around 20-30% that wraps up sometime in 2017-2018 that is the final cyclical bear of the secular bear that I still believe we're in and that will be the sort of 1982 moment where we are ready to take off back to much higher highs..."