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.
