Unusual Indicators: Should You Believe These 5 Stock Market Truisms?
Everyone wants to know when the market will soar and when it will sink, and over the years, investors have come up with a litany of ways to predict how stocks will move.
Everyone wants to know when the market will soar and when it will sink, and over the years, investors have come up with a litany of ways to predict how stocks will move. Many of the classic market truisms are rooted in legitimate data, but when it comes to investors actually putting them into practice, some are more wacky than useful.
Presidential Cycle
- The principle: The stock market follows distinguishable patterns depending on the year of a president’s term.
Track record: Between 1949 and 2017, the Dow Jones industrial average returned an average of 15.8% in preelection years, as incumbent administrations did what they could to goose the economy.
- Looking ahead: The indicator suggests that 2019 will be a good year for stocks.
Sell in May and Go Away
- The principle: The stock market posts its weakest returns from May through October, suggesting that investors should lighten up on stocks during that six-month period.
- Track record: Since 1945, the S&P 500 has averaged a 1.4% return in the May-through-October period. November-through-April returns average 6.6%.
- Looking ahead: Though the data are compelling, market-timing is rarely the best strategy, especially if you’ll incur transaction costs and tax consequences.
As Goes January, So Goes the Year
- The principle: Stock market performance in January tends to predict calendar-year performance.
- Track record: Since 1946, a positive January return in the S&P 500 has resulted in an 11.1% average gain over the next 11 months. A January loss has resulted in a 1.3% average gain.
- Looking ahead: The S&P 500 gained 7.9% in January, presaging an upward trajectory for stocks for 2019.
Hemline Theory
- The principle: Women wear shorter skirt styles during periods of positive market returns and economic prosperity.
- Track record: Believers point to short skirt styles in the economically prosperous 1920s and 1980s, each of which saw dress styles lengthen around market crashes late in the decade. But serious market-watchers dismiss the indicator as pure superstition.
- Looking ahead: For what it’s worth, plenty of lengthy skirts graced the runways at the latest New York Fashion Week, a potential bearish signal.
The Super Bowl Indicator
- The principle: The stock market tends to perform better when an NFC team wins the Super Bowl as opposed to an AFC team.
- Track record: Through Super Bowl 52, the S&P 500 produced a positive calendar-year return 79% of the time following an NFC winner and 63% of the time after an AFC winner.
- Looking ahead: The Patriots’ victory should presage a poor year for the market, but not everyone’s a fan of this indicator: InvesTech Research president James Stack calls it “a discovered and invested coincidence.”
