February is the worst month for stocks during the first year of the presidential cycle
The following is a reprint of the market commentary from the February 2017 edition of The Option Advisor, published on January 27. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.
Most investors are familiar with the conventional investing wisdom assigned to specific months and seasons of the year. There's the Santa Claus rally that triggers year-end gains; the January Effect that pushes shares higher in the first month of a new year; the perennial admonition to "sell in May and go away"; the September Effect that translates into weak returns -- and, of course, the apparent October curse that sparked stock market crashes in 1929, 1987, and 2008.
But what about the abbreviated month of February? Every four years or so, we might expect to see a quick burst of headlines discussing the novelty of a Leap Day being added to the trading calendar -- but otherwise, the second calendar month of the year appears to be generally unburdened by the baggage of seasonal tropes.
In fairness, February does tend to be a somewhat unremarkable period for stocks. Over the past 50 years, the S&P 500 Index (SPX) has been just barely positive for the month -- up 0.14% on average, with an equally less-than-eye-popping 0.64% median return. The percentage of positive returns is squarely at 56%, pointing to slightly better-than-coin-flip odds of an advance, and February's standard deviation is on the low-to-middling side of the monthly range, at 3.90%.
Aside from the data quirk that is Leap Day, though, there's another "once every four years" event that investors should keep at the forefront this February: the first year of a new presidential cycle. Our Senior Quantitative Analyst Rocky White (who crunched all the numbers you'll see below) discussed in a recent Indicator of the Week feature that the first year tends to be the worst for the market of the four-year presidential cycle, with the first half of that year being a particularly challenging stretch for stocks.
And when we drill down further on the S&P's performance during the first year of a presidential cycle, we find that February is actually the worst month of those years -- with not only the lowest average return of -1.60%, but also the lowest median return of -1.47%. These "First-Year Februaries" have been positive only 42% of the time, and are ever-so-slightly more volatile than an average February, based on the standard deviation of 3.98%. (Among other months, August is nearly as bad, though the downside volatility is not quite as steep; meanwhile, June is only rarely positive, but the losses have historically been modest.)
With stocks trading near record highs -- and with the market only halfway through what has traditionally been its strongest six-month stretch -- this is not a call to "sell in February and go away." Instead, a more measured response would involve acquiring hedges for long stock positions, or -- as Senior V.P. of Research Todd Salamone prescribed in his latest Monday Morning Outlook -- hedges against a volatility pop.
For those traders looking to capitalize on the likelihood of another poor "First-Year February" for the stock market, the 10 names below should merit some further inspection. Over the past decade, these stocks -- all optionable, and all meeting our reasonable minimum liquidity standard -- have consistently performed worse than the broader S&P in February, which should appeal to investors looking to mitigate risk by adding some short equity exposure.
And despite the less-than-stellar historical returns for stocks in February, there are sure to be a few standouts during the next month. To that end, we'd recommend the list below as a jumping-off point for those looking to add long equity exposure, as these 10 names have consistently bested the S&P during the shortest month of the year.
