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The stock market is in the grips of a manic-depressive mood swing this year, no question.
But after testing its long-term trend line for the third time this week (see chart below) the S&P 500 has rebounded strongly.
Is the worst of the market correction over, with new highs in sight?
In time, I believe YES… This bull market isn’t done yet.
BUT stocks are now facing seasonal headwinds, which historically are not kind to investors.
Let me explain…
The Seasonal Soft Spot
No doubt you’ve heard the old adage: “Sell in May and go away.”
Historically, the summer months (May – October) have shown the worst stock market returns on average.
May is traditionally one of the weakest months for the S&P 500 with an average loss of 0.05% since 1928.
And after a brief summer rally, August-October is the absolute worst 3-month period of the entire year.
But it gets even worse…
Source: BofA, Merrill Lynch
The Election Effect
2018 is a midterm election year and since 1928 this has been particularly bad for stocks.
In fact, stocks have posted negative average returns in four out of the next five months when facing political uncertainty from midterm elections.
And since 1928, stocks have declined an average of 3% or more during the summer!
The silver lining is that stocks typically make up this lost ground and then some during the fourth-quarter of midterm election years.
Historically they’ve posted average gains of 6.4% over that stretch.
So what does this mean for stock investors in 2018?
Bottom line: The first four months of this year were weak with the S&P 500 up just 1%.
And with stocks now finding some support the market could experience more whipsaw action in the months ahead.
If this is the case however, my money is still on stocks when the season turns to fall.
Because that’s the season when stocks typically regain their usual seasonal strength.