Initial Conditions, Conditional Probabilities & The September S&P

Beast Mode In September?

Can’t tell you how many recommendations we read at the end of August about how the S&P500 would continue its Beast Mode rally into September.   After all that it was it does during midterm election years, no?  It may still yet but not so fast, comrades.

August And September Gains Rank High

We looked at the sum of the monthly gains for August and September and found that the 2018 performance ranked in the 84^th percentile of late summer rallies over the past 70 years.   How does the S&P perform in September after such gains?

What Now For September?

Glad you asked.

Realizing that the past is not always prologue,  empirical probabilities suggest there is only a 36 percent probability of making money on the long side in S&P500 in September given such large gains registered during August and September.

The table above illustrates that only during 11 years since 1950 has the S&P outperformed this year’s return for July and August.

Interestingly, 45 percent of those annual observations were during midterm election years; significant given midterms only occur 25 percent of the time.

The average return for the 11 years was  -0.1 percent with median -0.3 percent.  Five of the 11 years took place in midterm election years, with only one election resulting in a change in Congressional leadership, in 1994.

Moreover, we suspect the coming change in the leadership in the House of Representatives will not be as market-friendly as the 1994 Republican rout and capture of both houses of Congress.

Initial Conditions and Conditional Probabilities

It is important to go deeper when you hear forecasts based on simple extrapolations or analogs.   Is it priced?  What are current valuations relative to history?

Deep state, deep fakes, deeper analysis.