I’ve written before about investment banking giant Goldman Sachs’ warnings… and why you should ignore them.
So far, that’s turned out to be good advice.
For all the hand-wringing surrounding the U.S. trade war with China…
The fading sugar high of the Trump tax cuts…
And warnings that U.S. stock markets are expensive…
Both the S&P 500 and the Dow continue to climb the “wall of worry.”
This highlights one cold hard truth…
The U.S. stock market’s positive momentum trumps the countless gallons of ink spilled on (erroneous) predictions of a market top.
That’s why in my trading I prefer to listen to the market rather than predict what it’s going to do.
With that caveat, I want to share with you why I’ve turned bullish on how the U.S. stock market will perform over the coming six to eight months.
Two Market Anomalies Converge
As a longtime student of market history, I’ve learned this valuable lesson…
History does not repeat itself… but it does rhyme.
With the end of 2018 rapidly approaching, markets are entering their most bullish part of the investment year.
Perhaps you’ve heard the investing maxim “sell in May and go away.”
This refers to the market anomaly that U.S. stock markets tend to tread water from May through late fall. (And, conversely, that investors make most of their money between November and April.)
The statistics supporting the pattern are compelling.
Since 1950, money invested in the Dow between November and April has returned an average of 7.5%. Money invested during the other six months of the year generated an average gain of only 0.3%.
But the winter period between 2018 and 2019 offers the prospect of even greater returns.
This coming November through April period marks the beginning of the third year of President Trump’s first four-year term.
Why does this matter? The idea behind the U.S. presidential election cycle anomaly is straightforward…
In their third year, presidents will do whatever it takes to ensure the economy is firing on all cylinders in time for the next presidential election.
That explains why the U.S. stock market tends to perform better in the second half of a president’s four-year term than in the first half.
Academics Kam Fong Chan and Terry Marsh studied both anomalies going all the way back to 1896.
They found that when the “sell in May” and U.S. presidential election cycle anomalies converged, there was an astonishing 11% difference in the Dow’s performance between the summer and winter periods.
Surprisingly, they found a similar disparity in the stock markets of Canada, France, Germany, Italy, Japan, Britain, Australia and Singapore.
The point is… when you combine the two anomalies, voila! You have the makings of a blowout period for stock market performance across the globe.
Now, before we get too carried away…
Just because markets outperformed this way in the past does not mean they will do so in the future.
Market anomalies tend to disappear soon after they become widely known.
Still, for reasons no one can quite explain, both of these anomalies have stood the test of time.
And when you have them converging as you do this year… well, that should get your attention.
So how do I plan to use these insights in my own investing?
Each year, I already tend to invest more aggressively between November and April.
This year, as we’re coming into the third year of the presidential cycle, I will likely amp up my risk even more.
(That said, I’ll always have risk management systems in place to limit my losses in case the market proves me wrong.)
So what’s the takeaway?
Understanding where we are in the current market cycle is crucial.
That’s because investors make most of their gains during specific periods.
These two historically robust market anomalies converge only once every four years.
Take advantage of it.