Market Analysis - Kira Brecht
Why The Stock Market Is Really Rallying Right Now
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
(Kitco News) - Feb 17 – The stock market bull cycle still has a full head of steam. The S&P 500 has rallied steadily higher since the U.S. presidential election in November – as investor's price in expectations for a host of positive outcomes. Those include expectations for a big fiscal spending bill to boost economic growth, deregulation and a tax cut package.
A lot of good news has been priced into the market. That leaves the risk that the not all the goals are met and the market needs to reprice lower.
Don't worry – at least not this month. History and seasonals are on the stock market's side right now.
November-April: Best Six Months
The stock market is in the midst of its bullish Best Six Months period as named by the Stock Trader's Almanac. This is a very real phenomenon.
Historical data shows that most of the stock market’s gains have been made in the Best Six Months from November to April. Then, the market has generally gone sideways in the Worst Six Months from May to October and/or been most susceptible to major declines, says Jeff Hirsch, editor of Stock Trader's Almanac.
The numbers: From April 1950 to October 2015 the S&P 500 gained 1857.83 points in the Best Six Months versus 203.46 points in the Worst Six Month, according to the Stock Trader's Almanac. The Best Six Months combined have produced an average DJIA gain of 7.5% since 1950 compared to an average gain of just 0.4% during the months May to October.
A New President in the White House
That's not all. The first 100 days of a new President's term is generally a positive event for the stock market – filled with hope, optimism and projections of "what could be."
Since 1948, when a new Republican president has taken office in the U.S., the stock market has climbed in price 80% of the time from the November-April period, according to data from CRFA's Sam Stovall.
Very interestingly, the 100 days ends right at the beginning of May – historically a negative seasonal period in the stock market. You've all heard the "Sell in May and Go Away" adage.
What happens in May according to historical data? Since 1948, when a new Republican president has taken office in the U.S., the stock market was down 80% of the time in the May-October period.
Blame it on seasonals. Blame it on expectations falling to meet reality. No matter the excuse, coming up on May 1 – stock market investors will face the double whammy risk of seasonally weak performance, combined with the tendency for the market to retrench at that point after a new Republican has taken office.
What This Means for Gold
The gold market is already performing well – up 7.5% in the first seven weeks of 2017. That compares to a 4.71% gain in the S&P 500.
As the calendar flips to May 1, the stock market will become vulnerable. Some measures show historical levels of overvaluation in the stock market. That easily leaves the S&P 500 susceptible to a pullback or correction come spring.
Gold normally shows a low correlation to stocks. The long-term correlation from 1975 to 2015 between gold and the S&P 500 is 0.006 or 0.6%, according to the World Gold Council.
For all you number crunchers out there, this is where the data get really interesting. When an equity pullback is strong and severe – an equity shock perhaps, gold has historically demonstrated an exaggerated response to the upside.
When the S&P 500 has dropped by more than 4.4% in a week, or the equivalent of more than two standard deviations; the correlation between stocks and gold falls to -0.15 or -15%.
The bottom line: In plain English, stocks are vulnerable to a historical and seasonally correction this spring and summer. Gold tends to rise – sometimes significantly – when stocks fall sharply.
Gold is already up 7.5% this year – but just wait the second half of the year could be even better.