The four seasons of investing

Since times immemorial, man has been a witness of the cyclicality of nature and of life. It  starts with your pulse, your heart beat, the pace of your breathing,  the daily sun sets, the tides and the moon, the seasons etc, a  surrounding all encompassing cycle of births, growth spurts, maturity and decay, all dictated by the same thermodynamic law of entropy, a booming spark of chaotic energy that eventually gets diffused into orderly cold matter. This same universal clock of ascending and descending energy is at work in markets and is what the great technicians Charles Dow, Ralph Nelson Elliott and William Gann have described over centuries.  They too noticed the fractal nature of market cycles, made of long ascending and descending primary trends, themselves made of ascending and descending intermediary trends, themselves made of smaller trends etc. In brief, cycles within cycles.  This dialectical historical mechanics is the way of the Tao or what was described in the Ch

The business cycle can be divided into two again. The year can be divided into two distinct periods an ascending accumulation phase followed by a descending distribution phase.  Every asset class or sector would be subject to some form of seasonality. In the equity markets, 1) the period between May and October where volatility tends to be higher and returns for equity investors have been traditionally poorer since the 1950s and 2013 2) the period between November and April which have concentrated the bulk of positive returns over the years, such that when Q1 is strong, follow up quarters have generally difficulty to catch up (since 1970, every time Q1 up 6% or more then the market has risen on average by 8%). The reasons are opaque and the pattern changed over the years, as the influence of agriculture on the economy declined and the importance of retail inventory cycle grew.  According to a 2017 column in Forbes magazine, buying the Dow Jones Industrial Average in May and

By now, you probably get the picture: divide a Kitchin into 2 and you get what is effectively the business cycle, also known as the inventory cycle, because it coincides with the effective restocking and destocking taking place in the economy year after year. This cycle is the most followed by market observers. The ISM and Ifo surveys as well as the so called PMI data amongst others do track these ebb and flows of industrial activity or how money gets in or out of the real economy. As a result and because money has to find a home, a weaker economic trend tends to drive money back to financial assets like bonds, while a stronger reading tends to drive real assets like equities or commodities.  Not surprisingly, the year on year changes of the S&P500 or oil price for example do closely track the ups and downs of the ISM.

Divide a Juglar or an Armstrong cycle by two and you get what is known as Kitchin cycle, a 4 to 4.5 year cycle, also known as the “presidential cycle”, because it coincides with the electoral clock of the United States, the world’s leading economy and home of the world’s reserve currency. There is no doubt that the interactions between the fiscal and monetary cycles are major factors in monetary aggregates and as such do influence the US dollar and therefore pretty much every asset classes. That said, whether the political cycle is the cause or the result of a wider and more complex socio-economic machine remains a matter of debate.   Politicians would be the first to take credit for any economic upswings and blame the downturn on the cycle itself. Like Kondratieff in his times, the purpose of this post is not to explain, but to expose a cycle that effectively corresponds to the bull-bear cycles of most equity markets and therefore, the average length of bull mar