Chart of the Month – October 2018

History Echoes Every Decade


Much time is spent in the investment industry scouring charts looking for patterns that will forecast the direction of markets, currencies, commodities and even individual stocks. This activity is known as technical analysis and there is much debate as to whether it is a science, an artform or a waste of time and energy. Most serious investors have now embraced technical analysis at least as a part of their investment process. As a result of the amount of work that is done in this field there are many unproved strategies that have been adopted by the less informed, usually accompanied by a convenient rhyme: ”Sell in May and go away” indicating that the markets would peak in May and conveniently be unproductive in the summer months with a blowout in October and then a “Christmas Rally” to end the year. A study of the past ten decades indicates that the worst month for the market has on average been September, not October, but does confirm a rally after October through to the new year.

On a longer time-frame there are many long waves that analysts have identified. The longest being the Kondratieff Wave which lasts approximately sixty to seventy years and ends in a depression or “Kondratieff Winter”. There are also four-year and ten-year economic cycles that are frequently identified. It is useful to equate a business cycle to a stock market cycle and thus some analysts have in fact tried to compare the ten-year economic cycle identified by Clement Juglar in 1862, with the most profitable years in a decade for stock market investors. As one can see from the chart the most profitable years on average are those ending in three and five and the least profitable end in zero, one and seven. We certainly do not recommend making investment decisions based on these assumptions, as averages can hide a great deal of variation. It should be noted that of the 22 observations of negative annual returns over the past ninety years, four have occurred in each of the first two years of a decade and in two instances each of the first three years of a decade have experienced negative returns.