Bulls look for “old” pattern in 2019

●Most 2018 market forecasts were off the mark

●Post-midterm election pattern still in play for US stocks


Let’s be honest, almost nothing most market prognosticators thought would happen in 2018 came to pass. Because—let’s be honest again—most people were looking for an extension of the bull-market conditions that dominated most of 2017. Here’s a taste of what didn’t pan out in 2018:

●The tax cuts and deregulation that were widely expected to fuel another leg of an already historic bull market, didn’t.

●Small-cap stocks, which were supposed to get an extra boost from those tax cuts—and be less susceptible to trade wars than large caps—have been the year’s worst performers, with the Russell 2000 index (RUT) down roughly 10% in 2018 through December 17, despite strength earlier in the year.

Financial stocks (especially banks), which were expected to perform well as interest rates rose (a market development everyone knew was coming), also came up short. Financials finished in the bottom half among S&P 500 (SPX) sectors, with a -14% return in late December.

Ironically, the market even bucked a bearish historical pattern this year—the tendency for the US market to lose ground in the first 10 months of a midterm election year. From 1960–2016, the SPX had a -3% average return from January through October of midterm election years, and moved higher only 50% of the time. But this year, thanks to a nice bounce in the final two days of October, the S&P 500 closed out the first 10 months of 2018 with a 1.48% gain.

Now some (possible) good news for bulls: Since 1960, the S&P 500 has gained an average of 16.57% from the last day of October in a midterm year through the last day of October the following year, and (don’t mean to jinx things here) has never posted a loss in that 12-month period:

S&P 500 average midterm election returns, 1960–2016. Perfect batting average on the line.

Source: Power E*TRADE

November and December may not have gotten things off to the bullish start many people had hoped for, but a lot can happen between now and Halloween.

And here’s an additional tidbit in the event 2018 turns out to be a down year for the Dow Jones Industrial Average (DJIA): Since the end of World War II, down years have been followed by additional down years only three times: 1973-74, 1977-78, and 2000-2002. The other 14 down years were all followed by up years.

There are never any guarantees, but it may be something for contrarians to think about given the current bearish sentiment.

Today’s numbers: S&P Corelogic Case-Shiller HPI (9:00 a.m. ET).


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