economic/stock market cycle: 4 years or 8?

phone call from sunny CA

My younger son called the other day to talk about the stock market.  He reminded me that I had often spoken as he was growing up about the four-year stock market cycle seen in the US.  It’s sometimes called the presidential election cycle, from the belief that the sitting president injects PEDs into the economy in the fourth year of his term to aid his reelection bid.  It’s also called the inventory cycle.

the traditional four-year market cycle

The idea behind this is that in the post-WW II US the typical period of business cycle expansion, during which government policy is to stimulate growth, has lasted about 2 1/2 years.  As we reach full employment and upward wage pressure commences, the policy stance reverses.  Interest rates rise; the economy slows–and sometimes contracts.  This latter period lasts around 1 1/2 years.

The stock market exhibits the same behavior–2 1/2 years of up followed by 1 1/2 years of down–but leads the economy by about six months.

a rule of thumb

The four-year cyclical pattern generates a practical rule for investors:

–when the stock market has been rising for two years, start thinking about becoming more defensive, and

–when the market has been falling for a year, think about becoming more aggressive.

the eight-year cycle

The point of my son’s phone call is that this traditional pattern can’t be found in charts of market action for almost two decades.  It has been replaced instead by an eight year cycle–5 1/2 years of up, followed by 2 1/2 years of down.  More importantly, two months ago, we entered the fifth year of rising market.

His conclusion from looking at the charts:  early in 2014 the S&P will hit the skids.

 

This is a very interesting thought, even if it turns out not to be correct.  It makes you stop looking the leaves on individual trees and start to think about the shape of the forest as a whole.

differences?

Is the stock market situation today substantially different from the tail end of the internet bubble of 1999, or of the emergence of the mortgage fiasco/financial crisis of 2008?  If so, what are those differences?   …can we conclude that today’s story will end up any better than those two did?

I think there are key differences.

More about this on Monday.