Pre-Election Seasonality Suggests August Could Be Bumpy For Equity Markets

Below is an excerpt from the weekly Thrasher Analytics letter sent to subscribers every Sunday.

Looking now at the seasonal patterns for equities, we'll start with an update on the pre-election data. Below are the prior pre-election years since 1995 along with the current year (shown in black). So far, this year has tracked well with most previous pre-election years and for the last three months, it has been the best performing pre-election year of the periods shown.

Of varying degree, going into August we've seen a pullback in nearly all pre-election years. From the approximately -11% drop in 2015, -9% in 2007, -5% in 2019, -3.5% in 2003, and-2% in 1995, each year hit a short-term rough spot in August. While the sample size isn’t that large, history does suggest that when markets have been this strong going into August, the bumps brought on by seasonality have been less severe. Note that 2003 and 1995, the periods of similar performance as today were the least volatile compared to 2011 and 2015 which were the weakest periods from May through July.

Obviously, we can look back at these periods and point to other market-driven catalysts going on in each of the years, specifically 2011 and 2015, but seasonality can act as gas being thrown on an already burning fire - either as a bullish or bearish propellent. The positive, is these dips were followed by year-end rallies. Does this suggest the market must see a decline in August? Of course not. But as a technician, I believe it’s important to know where the seasonal winds are blowing and then evaluate whether the current market follows or breaks away from that historical pattern.

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