Alpha Power Investing Newsletter

September 1, 2020

A Glimpse of the Future - Part II

In the August 2020 newsletter we highlighted a variety of market trends that are getting a bit long in the tooth, and/or a bit overdone in one direction. The purpose was simply to remind investors that no trend lasts forever in the financial markets, and that as soon as investors become complacent with "the way things seem to be", things typically change. Often dramatically. This month we will highlight a few more factors in the same vein. However, let's first revisit one cyclical trend that has proven to be consistent over the years.

The Power Zone Starting in an Election Year
As you are likely aware, the heart of several of Alpha strategies is the long-term outperformance of the S&P MidCap 400 Index during the months of November through May. The 2019-2020 period was clearly a painful exception to the rule as the MidCap Index took a significant hit during the COVID-19 selloff in February and March. But investors need to recognize that nothing is "perfect" in the stock market and that even the most persistent trends can deviate greatly from time to time. As 2020 progresses, we look forward to the start of a new Power Zone period beginning on November 1. Let's take a closer look at the performance of the S&P MidCap 400 Index for the November through May Power Zone periods that begin during a presidential election year.

The S&P MidCap 400 Index first came into existence in early 1981, which was a post-election year. So, for that year we will use only January 1981 through May 1981 return data to measure performance. Starting with the next election year in 1984, and for each subsequent four-year election cycle, we will measure performance for the full November (election year) through May (post-election year) period. Figure 1 displays the total return for the S&P MidCap 400 Index for each election year/post-election year Power Zone period since 1981.

The key things to note regarding the 10 Power Zone periods measured:

  • All 10 periods (100%) showed a gain
  • The average gain was +14.0%
  • The largest gain was +23.5% (1988-1989)
  • The smallest gain was +0.9% (2000-2001)

Figure 2 displays the cumulative % total return for the S&P 400 MidCap Index ONLY during Power Zones that start during an election year.

Looking Ahead
The next Power Zone begins November 1 of this year and extends through May 31, 2021. If history proves to be an accurate guide, investors should look for the stock market to show continued strength through May of next year.

In the Meantime
The stock market has enjoyed a terrific run since the bottom in March 2020 (to the surprise of the majority of investors). As we have just discussed, there is reason to remain optimistic about the market into the middle of 2021. At the same time, it should be noted that the September-October period has witnessed a great deal of volatility - and more than its fair share of downside price action - over the years. To highlight this, we will use the S&P 500 Index, which we can trace back to 1928, in order to get a longer track record.

Figure 3 tracks the price gain or loss (not total return) for the S&P 500 Index ONLY during September and October of every presidential election year starting in 1928.

Of the 23 September-October election year periods measured:

  • 13 showed a gain and 10 showed a loss
  • The average performance was a loss of -0.47%
  • The best performance was a gain of +8.2 (1996)
  • The worst performance was a loss of -24.5% (2008)

Figure 4 displays the % price change for the S&P 500 Index ONLY during September and October of each presidential election year in graphical format. As you can see, the results vary widely with some serious bouts of downside volatility along the way. The bottom line is that due to the two huge losses in 1928 and 2008, the cumulative % price return for September and October of election years since 1928 is -16.4%.

Given the rip-roaring advance we have seen in the stock market since the lows in March, and the seasonal tendency for weakness in the September/October period of presidential election years, we should not be surprised to see the market cool off and possibly experience some greater volatility in the next couple of months. Following that however, history suggests that bullish market activity may continue at least into the second quarter of 2021. The strategies offered by Alpha Investment Management are designed to maximize gains during the typically bullish Power Zone months of November through May.

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 on indexes 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 were 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.

Alpha Power Investing Newsletter Archives

© 2020 Alpha Investment Management, Inc.