The stock market took a tumble this past Thursday for a drop of roughly -1.5%. While it was only a drop of 1.5%, the S&P500 tends to pull-back to the tune of -3 to -5% about three times per year. In addition, the market typically experiences a correction of -11% or so, on average, each year since The Great Depression. Bad days in the market (like the one we saw on Thursday) are normal. However, there are three things you should know about the market this year as we make our way out of summer.
1: Years ending in “7” have not been good to the stock market
When observing the performance of the market in years that end in seven, the last half of the year leaves much to be desired. Just take a look below at the events that took place and the corresponding market drops:
Source: J Lyons Fund Management
The following chart shows the total average performance of the Dow by 10-year cycle, which provides further evidence as to how the second half of “year-seven” tends to be rough on the market. Believe it or not, the average drawdown in these seventh years has been a whopping -20.69% since 1900!
Source: Larry McMillan / Options Strategist
2: Post-election years are the worst of the 4-year cycle
When we observe the total average performance of the stock market in each year of the election cycle, the post-election year is the worst of the four.
Some say that it’s because the politicians have won their seats and couldn’t care less about what they do in their first year (they don’t have to worry about getting voted out just yet), but I like to think it has a lot more to do with uncertainty.
Specifically, whenever a new presidential term starts or an all-new president takes over, we’re likely to experience more uncertainty in that first year than we would the other three. It goes without saying that the market hates uncertainty, which is also why it loves political gridlock – the politicians can’t get anything done!
3: August and September are the worst two months of the year
Last but certainly not least, August and September just happen to be the worst performers, especially in election years. Of course, the fact that the two months are back-to-back doesn’t make matters any better.
As we continue through the second half of August with the Dow currently up 0.17% month-to-date, I think it would be wise to pay closer attention to your investment portfolio, considering this fact (and those mentioned above).
Keep in mind, these are just historical statistics. In other words, it is entirely possible for the market to spit in the face of history and buck these trends, and if that happens, I would change my tone and adjust my outlook through the rest of the year and into 2018.
I believe it would be wise to tread lightly, be more conservative, and proceed cautiously through these next few months. If I’m wrong and the market shoots higher, then we can always be more aggressive tomorrow. On the other hand, if I’m wrong and instead err conservatively on the side of risk management, I can always use the money I saved to buy more tomorrow, even if it means paying a little more than yesterday.
I think there’s a lot to be said for stepping back, turning down the risk dial, and waiting for things to improve before taking further aggressive action.