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Midterm election years challenging for stock market

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Seasonal tendencies of stock prices make for interesting conversation. Pundits offer the brilliant advice of “Sell in May and go away,” which means liquidate your portfolio to avoid a summer/fall swoon. Heeding this, you must be completely reinvested in time

to catch the “Santa Claus rally,” the market’s post-Christmas gift to investors.

A more persistent seasonal anomaly is the “presidential cycle,” a pattern of performance coinciding with various years of a presidency. In particular, Year 2 of a presidency is a midterm election year (MTEY), with congressional elections held in November. Historically,

stock prices have been weaker in MTEYs than in Years 1, 3 or 4 of a “presidential cycle.”

We are at the halfway point of 2014, an MTEY, so it’s instructive to review performance in similar years. While past performance is no guarantee of future results, studying historical patterns may give clues as to what to expect in the weeks and months ahead.

Sam Stovall, chief equity strategist of S&P Capital IQ, examined monthly price changes for the S&P 500 Index since 1945. He found the S&P 500 recorded the worst six-month stretch of the entire 16-quarter “presidential cycle” during the second and third quarter of the MTEY, with average declines of 2.5 percent and 0.3 percent, respectively.

According to Stovall, the MTEY effect was even more pronounced for small-capitalization stocks. Since 1978, the Russell 2000 Index declined 3.5 percent and 6.6 percent during the second and third quarters of MTEYs, respectively.

Fortunately, the two worst quarters of the “presidential cycle” were followed by the three best.

Jason DeSena Trennert, CEO of Wall Street research firm Strategas Research Partners LLC, examined the S&P 500’s performance during MTEYs in a different light. The S&P 500 experienced a swoon in 100 percent of the 13 MTEYs starting in 1962, with maximum, minimum and average peak-to-trough declines of 38 percent, 8 percent and 19 percent, respectively.

On a brighter note, Trennert looked at the S&P 500 one-year from the trough and found it was higher 100 percent of the time. The lowest bounce was 12 percent, the highest 58 percent and average 32 percent.

The S&P 500 was up 5.2 percent in the second quarter and has avoided a 10 percent correction in this MTEY. History suggests investors could be in for rougher sailing in the months ahead. You should be neither surprised nor discouraged.

Mickey Kim is the chief operating officer and chief compliance officer for Columbus-based investment adviser Kirr Marbach & Co. He can be reached at 376-9444 or

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