The S&P 500 Is Entering a Historically Bullish Stretch

The S&P 500 Index (SPX) is up about 12% this year with one quarter to go. We should feel good about this, given that it's a midterm election year (which I call the second year of the four-year election cycle). The index averaged a return of just 4.62% in the second year of the cycle with 53% of returns positive. It's been the worst year of the cycle by a significant margin. The first and fourth years (the latter being the election year) have each averaged returns of more than 8%. Famously, the third year has been outstanding, with the SPX averaging a 17.2% return and finishing positive 89% of the time.

For those who play seasonality, I'll show why you shouldn't wait for that third year of the cycle to buy into the market. Get in right away.

The next table summarizes SPX returns by quarter since 1949. The fourth quarter has been the best, with the index averaging a 4.25% return and more than 80% of returns positive. The next-best was the second quarter, averaging a 2.16% return with 63% of returns positive.

Next, I broke down the second year of the presidential cycle by quarter. The first three quarters have not been good for stocks. The first and third quarters each averaged a return of about 0.3%. The second quarter has tended to be horrendous, with the SPX averaging a decline of almost 2% and just half of returns positive. In the fourth quarter, however, things usually turned around. Going back to 1949, the SPX averaged a 6.63% fourth-quarter return, with 84% of returns positive.

The next tables break down SPX returns by quarter for each year of the presidential cycle. Interestingly, the two best quarters are back-to-back: the fourth quarter of the second year (the quarter starting this Thursday) and the first quarter of the third year. Since 1949, the upcoming quarter has averaged a return of 6.63%, with 84% of returns positive. Those figures are second only to the following quarter, during which the SPX averaged a return of 7.39% and an impressive 95% of returns were positive.

If you're playing seasonality, history suggests there is little reason to wait.