There is ample historical evidence to support that idea that mid-term election years deliver the most volatility and thus the biggest corrections. A recent article on Covestor summed up the data with the help of veteran market historians Sam Stovall and Sy Harding.
According to Stovall, chief equity strategist at S&P Capital IQ, "Since WWII, mid-term election years have seen pullbacks, corrections and bear markets conclude within these years, and these declines averaged 20%."
"Much of this 'mid-term mayhem' is due to its placement within the presidential cycle," says Sam. Below is his graph, courtesy of Covestor, which clearly displays that the greatest number of notable declines since 1945 were clustered in the mid-term election year, or the second year of the presidential cycle.
Again from the Covestor article...
"Sy Harding's Street Smart Report notes the second-year pullbacks tend to be worse when there was no correction in the first year of the cycle, and when the market, investor sentiment, and valuations had become quite extreme."
Hmmm. That sounds a lot like 2014 to some minds.
And many major Wall Street houses pay attention to these facts whether or not they should. So once again, historical patterns become self-fulfilling prophecies.
The double-digit decline unfolds when the next 6% dip doesn't get bought and everyone thinks the "buy the dips" playbook has changed for good.
Put in the context of a 32% return in the review mirror, this is probably something we should at least understand and pay some heed to while many other astute market researchers like Ned Davis are also calling for a 20% correction this year.
"The good news is that since at least 1918, there has been a significant rally from the low in the second year of the cycle to the high the following year, a rally in which the Dow gained an average of 50%," Harding adds.
What do you think... given the run we've had without a meaningful decline to wring out the excess speculation, does 2014 have "everything going for it" to be the Year of the Correction?
Postscript: For reasons why you should buy that correction with both hands, please see my Zacks Confidential report from Monday, "Stay Bullish in 2014: Why the economy, earnings, and investor behavior argue for new highs."
ISHARS-R 2000 (IWM): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research