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If history is any guide — and in this case, we’re talking about 130 years of it — investors should brace themselves for a sell-off in the stock market later this month.
Call it the Unlucky Rule of 7.
Stocks have suffered a pullback (defined as a drop of 5% or more in price), correction (a drop of 10% or more), or full-fledged crash (a drop of 20% or more) in every year ending in the number “7” going back to 1887.
The most famous cases were in 2007, which marked the start of the most recent bear market; 1997, during the Asian currency crisis; 1987, when the Dow plunged more than 22% on Black Monday; and in the so-called Panic of 1907, which witnessed the country’s biggest banking crisis prior to the Great Depression.
So far, 2017 has been free of such angst.
In fact, in the eighth year of this bull market, equities are up around 12% with virtually all U.S. stock indexes — the Dow Jones industrial average, the S&P 500, and the Nasdaq composite index — at or near their all-time highs.
But here’s the thing: In calendar years ending in 7, stocks almost always begin their descent in August or September — or in a few cases (like the 1987 crash) in October.
August 2017 was pretty much flat for the broad U.S. market. But now we’ve entered September.
Since 1945, September has been the scariest month for stocks, according to CFRA. The S&P 500 has lost 0.7% on average in September, making it by far the worst month for equities in the year, according to CFRA chief investment strategist Sam Stovall.
Doug Ramsey, chief investment officer for The Leuthold Group, recently re-examined the seventh-year phenomenon and confirmed the bad news.
“What particularly impresses — and depresses — us is that the August to November window of Year 7 has shown a strong downward bias, even when the extreme case of 1987 is omitted from the analysis,” he said.
At the very least, Ramsey added, “it goes without saying that Year 7 tends to see a massive volatility spike.”
Of course, all of this probably sounds really silly. Market watchers are the first to concede that there’s no logical reason why years ending in 7 have been so jinxed (and the second halves of those years have been particularly perilous).
On the other hand, taking a cautious view of the markets right now isn’t a crazy idea, whether or not (probably not) you believe in the ‘Rule of 7’. Stocks are already trading at historically high prices relative to corporate earnings. Meanwhile, the prospect for a big corporate tax cuts, the impetus the market’s big gains in the first part of the year, seem to be fading. That means the market may be due for a rough patch, no matter what the calendar says.
If the market does tumble, the calendar is certain to get at least a part of the blame.
“To prove that I’m probably ready for that aluminum foil hat, I would like to remind you that this year ends in the numeral seven, and markets tend to top out in the first three weeks of August in years that end in the numeral seven,” Art Cashin, UBS’s director of floor operations at the New York Stock Exchange, told CNBC recently.