Keep Calm and Carry On – It’s Just a Market Cycle

September 22, 2023  |  Michael Reilly

Everybody needs to settle down!

YES, the stock market is messy – and it’s not trending higher. I’m sure for many investors that’s both frustrating and scary.

But it’s not so scary or unexpected if you have taken the time to study your market history.

Yeah, I know. What a snooze fest!

But well worth a few minutes of your time.

So for all of you who missed that day in school – I bring you: Market History 101.

Don’t worry, this will be short, painless, and productive.

Markets have seasons.

Some seasons are sunny and warm – and others, well not so much. Sometimes the season is gloomy and cold.

This year is no different.

The market is following a very typical seasonal pattern, where the stock market struggles in the months of August and September – with September being the worst-performing month of the calendar year for stocks.

So the market is doing exactly what it often does this time of year.

And when we dig a little deeper into our market history and look back at 4-year Presidential cycles, you’ll notice that the stock market is also following its typical cycle behavior.

You can see it for yourself in the chart below. I’ve highlighted the Pre-Election year (2023) of the 4-year Presidential cycle.

The black line represents the historical 4-year cycle for stocks. The red line is 2023 specifically.

This year, the S&P 500 followed the historic trend by moving higher between January and July – its most recent peak, followed by August and into September with sideways consolidation.

Seasonality isn’t foolproof – sometimes markets ignore seasonal trends. But this is clearly not one of those times!

Go ahead… tell me “This time is different.”

It’s not.

In the history lesson I just shared, the data goes back to the 1950’s.

And in all those decades since, we’ve had Democrats in office, we’ve had Republicans in office, we’ve had high inflation and low inflation, we’ve had changes in monetary policy, higher rates, lower rates, etc, etc.

The fact is markets have seasonal and cyclical tendencies.

By understanding them you’ll not only be better prepared to manage the risks and opportunities that arise during these cycles, but you’ll have an easier time managing your emotions.

With that as our backdrop, let’s look at some current price action.

Here’s the S&P 500 index – stuck in a range between – let’s call it 4300 and 4600. What you want to pay attention to are these zones.

The S&P has continued to find resistance around 4600 and importantly has found support at 4300.

IF, 4300 holds, then we may be setting up for a rally into year-end (assuming markets can digest this week’s news on rates).

If 4300 doesn’t hold – then this may be the start of something more severe.

Big problems often start as small problems. So this is a chart you’ll want to keep an eye on.

I’m also watching Financials.

This is arguably one of the most important sectors in our markets.

Financials don’t have to be the strongest sector – but they can’t be the weakest either.

And that’s what I’m watching for.

Financials have to show up – or in this case, at least hold on. So far they’ve been able to do that.

As long as Financials can remain above the 2008 and 2018 highs, then this probably remains a longer case of messy for stocks in general.

However, if Financials (XLF) break below support – as they did in 2008 and 2018, it will not be a good sign for the market or U.S. economy.

So, the message is this – we remain in the seasonally weak part of the calendar year for stocks. They’re doing exactly what we would expect them to do.

But the question will remain, will Fed policy be too much for the markets to overcome or is this just going to be messy for longer?

Stay tuned as we watch for more clues.

If you’d like to talk more about how Avalon can help you position yourself to be ready for the changing markets, you can schedule an appointment today with one of our experienced advisors who will guide you through our various adaptive investment models.





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