WEEKLY ROUNDUP

[Weekly Roundup] An Old-Time Stock Market Indicator Is Flashing “Buy”

Hello, Reader.

Throughout the vast sweep of stock market history, a wide variety of “predictive” indicators have emerged to guide investors into the murky, unknowable future. These indicators derive their calls to action from signals that may be anecdotal, mathematical, or simply bizarre.

The Fibonacci Sequence, for example, projects likely stock advancements and retracements, according to the numerical theories of a 12^th century Italian mathematician. By the way, he began developing his formulas to project the number of offspring a healthy pair of rabbits would produce in a year.

Elliott Wave Theory also uses a formulaic approach to project likely turning points in the prices of stocks, commodities, and/or bonds.

Moving from the mathematical to the anecdotal, we find the Presidential Election Cycle Theory, which pinpoints the ideal years to own stocks during a four-year presidential term. The third year is best, on average.

Another member of the anecdotal category would be the Super Bowl Indicator, first “discovered” in 1978 by sportswriter Leonard Koppett from The New York Times. According to this indicator, the stock market will perform well during the year following an NFC victory in the Super Bowl but poorly after an AFC win.

During the last decade, however, this indicator has not worked as advertised. NFC victories have produced an average one-year gain of just 7.1%, while AFC victories have produced a hefty gain of 18.3%!

Lastly, in the “simply bizarre” category of indicators we find one that bases its “Buy” signals on the nationality of the model who graces the cover of Sports Illustrated’s annual swimsuit issue. Using data points from the 1980s and 1990s, this indicator determined that the stock market in the model’s home country would tend to rally during the four years following her appearance on the cover.

Although this quirky indicator first surfaced in 2000, it continued to produce a remarkable record over the ensuing years. Mexican stocks jumped 112% during the four-years after Elsa Benitez appeared on the 2001 cover. Argentine stocks gained 73% after Yamila Díaz-Rahi covered the 2002 issue, while Czech stocks skyrocketed 406% after Petra Nemcova made the 2003 cover.

For better or worse, this indicator went extinct in 2015. That’s the year Sports Illustrated began producing multiple covers for its swimsuit issue, rather than just one. But instead of shedding a tear for this lost indicator, let’s turn our attention to one rooted in cold, hard economic data – the Rate Cycle Indicator.

As the name implies, this simple indicator draws from historical precedents to show that stocks tend to rally during periods when the Federal Reserve is cutting interest rates. Dating back to 1981, the Fed has initiated nine distinct rate-cut cycles. In seven of those nine instances, the stock market rallied during the 24 months that followed the first rate cut.

Even after including the two instances that produced a negative result, the average two-year return from these nine instances totaled 36.3% – or more than 15% annualized.

These results shed a promising light on the year ahead, given the likelihood that a new rate-cut cycle is about to begin. When the Federal Open Market Committee meets September 17, it will likely announce the first interest rate reduction since July 2019.

At the same time, the Fed will almost certainly signal its intention to cut rates several more times over the coming months. That activity would be great news for the stock market, if the Rate Cycle Indicator holds true to form.

This indicator is not perfect, of course, but it clearly belongs in the “good stuff” category for the stock market.

In fact, the upcoming rate cut – no matter the size – is particularly favorable for the healthcare and tech sectors, where we hold positions in our Fry’s Investment Report portfolio.

These sectors tend to thrive during mid-stage recoveries. With high upfront research and development investments, they eventually reap benefits from lower interest rates, which cut borrowing costs and enhance profitability.

So, to learn more about which stocks I’m excited about, click here.

Now, let’s take a look back at what we covered here at Smart Money last week…

Smart Money Roundup

September Rate Cuts Are Becoming a Red Herring   The upcoming Federal Reserve meeting will likely mark the first interest rate cut in this economic cycle, and it’s sending waves of panic through the AI world. While stock investors remain convinced that jumbo cut is on the way, bond investors have been skeptical. To learn how a 25 basis point versus 50 basis point rate cut would impact AI and other key sectors, click here.