For all the bullish 2014 expectations among Wall Street analysts, few if any consider the impact of the long-term cycles. After all, it’s in late 2014 when several major long-term yearly cycles are scheduled to bottom in unison, from the widely followed 4-year cycle to the well-known 10-year cycle and on to the even bigger 40-year and 60-year cycles. Each of these cycles tends to stamp its unique presence on the stock market when they bottom individually. How much more then can we expect to feel their presence when they’re bottoming contiguously?
Putting aside the bigger implication of the long-term inflation/deflation cycle of 60 years, let’s examine just the 10-year cycle. This is one of the components of the long-term “super” cycle. As long-time readers of this report will recall, the last time the 10-year cycle bottomed was in 2004. This cycle always bottoms in the “four” year of each decade.
When it’s bottoming by itself the 4-year cycle doesn’t always create bear market conditions, but it does tend to increase stock market volatility – especially as the bottom draws closer (late September/early October). You’ll recall that 2004 was essentially a lateral or sideways trading range for the stock market with stocks making no net progress that year. While the year 2014 is still young, it’s worth noting that already the S&P 500 Index (SPX) has made no net progress to date while the Dow 30 Index is below its 2013 high. It’s too early of course to establish any intermediate-term patterns, but the makings of a trading range are already evident.
Even if you’re not a proponent of Kress cycle theory, consider that we’re in the second year of the 4-year presidential cycle. The second year following a U.S. presidential election year is almost always marked by increased market volatility. Not uncommonly the second year of a 4-year presidential cycle witnesses a bear market. Let’s examine the “second year curse” of the past few presidential cycles for some examples:
· The second year of President Regan’s first term in 1982 witnessed a volatile market environment with the S&P declining through the first half of the year; it marked the bottom of the 1970s/early ‘80s bear market. The second year of Regan’s second term in 1986 saw the S&P rally in the first half of the year; in the second six-month period of ’86 the stock market went nowhere and was range-bound until stocks took off again in 1987….
· The second year of President Bush’s term in 1990 was a bear market and witnessed the worst part of the S&L crisis; most of the damage was done in the July-October period when both the 4-year and 12-year cycles were bottoming.…
· The second year of President Clinton’s term in 1994 saw a mini-bear market. The S&P was down for the year after a number of extreme gyrations as the 4-year and 10-year cycles bottomed. The second year of Clinton’s second term occurred during the final “blow-off” phase of the ‘90s bull market, yet it witnessed the shortest bear market on record: a 20% Dow decline over two months in the summer of ’98 as the so-called Asian Contagion and the LTCM meltdown roiled global markets….
· The second year of President GW Bush’s first term witnessed a major bear market; the second year of his second term witnessed at least one major bout of volatility in the spring and early summer of the year 2006….
· The second year of President Obama’s first term saw the infamous “flash crash.” One can only guess what the second year of his second term will bring later this year.
The above overview of the presidential cycle reveals some common denominators. The first one is that years in which the 4-year cycle bottomed along with a bigger cycles, such as the 10-year or 12-year cycle, saw unusual periods of market volatility and selling pressure, particularly in the second half of the year. The second is that volatility tended to increase during the second year of a president’s second term. Both of these factors apply to 2014.
Based on our survey of the last 30+ years we can conclude that the second year of the sitting president’s term is typically a year when bad things happen. Why this should be is self-evident; a presidential administration has a vested interest in implementing policies designed at “juicing” the economy in the first year of the term in order to consolidate political support. The second year of the 4-year term is when most tax and regulatory increases are implemented. It’s assumed by presidents that they will be able to again juice the economy in the third and fourth years, and that voters will likely forget the bad times of the second year by the time the next election rolls around. Incidentally, the second year of a president’s term always coincides with the down phase of the 4-year Kress cycle.
The reason for taking pains to review the 4-year presidential cycle in tonight’s report is because there are strong reasons for believing it will come into play at some point this year. Maybe not in the next couple of months, but certainly by the summer we should see signs of increasing market volatility and accelerating selling pressure, especially as we head closer to the final bottom of the 60-year deflationary cycle this fall. If China and/or other emerging market countries are experiencing turmoil (as I expect) it will likely only serve to exacerbate the volatility.
Already we’ve seen a brief preview of what the next global market crisis could look like. The problems have originated in China and Russia with other countries (e.g. Brazil, Chile, Turkey) playing supporting roles. This is very similar to what happened in 1998 with the financial crisis that rolled across the globe beginning with Asia and extending to South America, Russia and finally hitting the U.S. like a tsunami. Few market analysts in 1998 (a super boom year) believed the “Asian contagion” would infect U.S. markets, but they were dead wrong. It happened very quickly in ’98 with most of the damage occurring in July through September – the final “hard down” phase of the 4-year and 8-year cycles.
Again, this summer the 4-year, 8-year, 10-year, 12-year, etc. cycles through the 60-year cycle will also be cascading into their final bottoms around late September/early October. It would be surprising indeed if the financial market somehow emerged unscathed by this crescendo, especially given the fragile state of the global economy.