Alpha Power Investing Newsletter

February 3, 2020

Hope for the Best, Prepare for the Worst

The U.S. stock market has been a terrific engine for capital growth ever since the 2008-2009 financial crisis ended. And the higher it goes, the more it seems like the good times will never end. And therein lies the danger. Thanks to continuing strong economic news, continued job and wage growth, a Phase 1 trade deal with China and an accommodative stance by the Federal Reserve, plus the stock market's own momentum, there is no reason that the "party" cannot continue indefinitely. On the flip side, we discussed the overvalued nature of the stock market based on the Shiller P/E Ratio in last month's newsletter, and the potentially negative impact on long-term returns.

So, should an investor be enjoying the ride or preparing for trouble? In our opinion, the answer is probably "both".

Strength Often Begets Strength
Upside momentum in the stock market often feeds on itself and leads to further subsequent gains. One objective identifier of upside momentum occurs when one of the major U.S. market indexes (Dow Jones Industrial Average, S&P 500 Index, Russell 2000 Index) registers four consecutive higher monthly closes. For example, all three of these indexes registered a monthly price gain in September, October, November and December in 2019. When this happens, the market tends to rise over the ensuing 12 months. Since 1971 there have been 50 times that this "four consecutive up months" signal has occurred (including April 2019 and December 2019). Of the 48 signals prior to April 2019, 45 of them (or 94%) witnessed the S&P 500 Index register a gain in the subsequent 12 months.

Figure 1 shows the cumulative total return for the S&P 500 Index if held for 12 months following four consecutive higher monthly closes for the Dow and/or the S&P 500 and/or the Russell 2000.

It should be noted that:

  • 45 of 48 signals witnessed a gain for the S&P 500 Index 12 months later.
  • The "average" 12-month S&P 500 total return following each signal was +12.4%.

While this appears to bode well for the stock market in 2020, it should be noted that the August 1987 signal was followed by the crash of October 19, 1987 (Black Monday) and that signals in 1972, 1997 and 2012 each experienced drawdowns in excess of -15% in the subsequent 12 months. So, while overall indications are favorable, investors should by no means consider it an "all clear" signal.

Decades Starting with an Election Year Often Show Early Weakness
As you are probably aware, Alpha pays a lot of attention to "seasonal trends" in the financial markets, even beyond those that we actually utilize within our current strategies. One of the oldest such trends involves the action of the stock market during the first two and a half years of a new decade which starts with a U.S. Presidential election year (i.e., 1900, 1920, 1940, 1960, 1980, 2000 and 2020). As we are now in early 2020 it is interesting to note that each of the previous 6 periods in this particular pattern witnessed a stock market decline. In other words, the Dow declined in price between Dec. 31, 1899 and June 30, 1902 and between Dec. 31, 1919 and June 30, 1922 and between Dec. 31, 1939 and June 30, 1942 and so on. Figure 2 shows the cumulative price performance for the Dow Jones Industrial Average during the periods indicated.

It should be noted that:

  • All six of the previous decade-opening 30-month periods saw the Dow register a net price decline.
  • The "average" decline was -14.6%.

So, what to make of all this? The most obvious suggestion is that the bull market will continue for the time being, but that some trouble may eventually unfold between now and mid-2022. Will things actually play out this way? We have no way to predict. But this potential scenario does make sense and also suggests that the "all-weather" strategies offered by Alpha Investment Management will fill an important role in investors' portfolios. Our strategies are ideal for conservative investors seeking consistently positive long-term returns. Our goal is to outperform the overall market from bear market low to bear market low and from bull market high to bull market high, i.e., across each full bull/bear cycle. This approach offers investors the potential to profit in both bull and bear markets.

Alpha's strategies are based on consistent, reliable long-term seasonal trends that are based on the one thing that never changes - human nature. As a result, we expect our strategies to perform well going forward "whatever the weather".

Jay Kaeppel
Director of Research

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in the charts above do not represent actual trading and are not representative of the returns of any strategy. The illustrations are designed to quantify the effect of certain time periods (as specified) on S&P 500 Index and the Dow Jones Industrial Average as specified. Indexes are not investment vehicles and persons cannot invest directly in an index. Index funds and ETFs may vary somewhat from index returns due to management fees and portfolio structure. The data used to construct the illustrations was obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.

The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security. Before investing in any fund and/or strategy, investors should consider the investment objectives, risks, charges and expenses of the fund/strategy and its investment options.  

Alpha Investment Management, Inc. is a SEC registered investment advisor located in the State of Ohio. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.