Pundits Practice Post Hoc

The mainstream media rounds up the usual suspects when trying to explain the latest stumble from the stock market. One expert had this to say:

Many factors have conspired to increase market volatility and push stocks lower over the last several weeks. Chief among them have been nervousness over the timing of Federal Reserve (Fed) interest rate increases, worries over the outlook for the Chinese and eurozone economies, the escalating Ebola epidemic in Africa, and rising geopolitical instability—particularly in the Middle East.

Others add the collapse in oil prices or commodities in general, global warming or just plain irrational fear. Technical analysts will cite the S&P 500 falling below the 200 day moving average or another favorite indicator, but that doesn’t explain why it fell through the glass barrier. Most of these are merely examples of the post hoc fallacy in which people notice that one event followed another and concluded that the earlier event must be the cause of the later one. An obvious example is attributing the rising of the sun to the crowing of a rooster.

Presidential Returns

In honor of President's Day this week I decided to take a look at a popular cyclical candidate running to help you time the stock market - the presidential election cycle. Jeffrey Hirsch, chief market strategist at the Magnet Æ Fund and author of The Little Book of Stock Market Cycles wrote about the technique in "Using Seasonal and Cyclical Stock Market Patterns" in the June issue of AAII's Journal. Hirsch's Stock Trader's Almanac has followed this cycle for fifty years and found it profitable.

Here is his graph of the average returns for the Dow Jones Industrial Average in each year of the four-year cycle from 1833-2012:

 

Hirsch explains that, "In an effort to gain reelection, presidents tend to take care of most of their more painful initiatives in the first half of their term and 'prime the pump' in the second half so the electorate is most prosperous when they enter the voting booths. The 'making of presidents' is accompanied by an unsubtle manipulation of the economy...By Election Day, he will have danced his way into the wallets and hearts of the electorate and, it is hoped, will have choreographed four more years in the White House for his party."

After the election, reality asserts control: