Jeff Hirsch, editor-in-chief of Stock Trader's Almanac, told Full Signal host Phil Rosen that stocks are entering the sweet spot of the four-year cycle, the stretch from the fourth quarter of a midterm year through the second quarter of a pre-election year.
He said inflation and energy prices are the biggest risks, but that a historic technology boom could overpower them.
I sat down with Hirsch on Full Signal to ask whether market history can still guide investors in an AI-driven market.
The four-year cycle's sweet spot
Hirsch said the market sits at the start of the best three-quarter combination of the four-year cycle, which begins in the fourth quarter of a midterm year. He pointed to October 2022 as a classic midterm-year bottom.
He said that stretch has averaged gains of about 19% for the Dow, 20% for the S&P 500 and 29.4% for the Nasdaq over the three quarters. Hirsch said his father coined the phrase "October phobia" in the 1969 almanac to argue that October is a bear killer and a bargain month.
It is not as simple as buying in October, he added, because he also weighs fundamentals and technicals. He cited a recent Atlanta Fed growth estimate of 5% and nominal GDP growth of 8% as supportive.
The super boom cycle and why seasonality survives AI
Hirsch described a second cycle he calls the "super boom," a pattern his father identified in 1976. In it, markets make enormous gains after war, inflation and government spending, alongside a "culturally enabling paradigm shifting technology."
He said AI fits that pattern and likened it to electricity. Even so, when I asked whether AI means we should drop seasonality, he answered "definitely not."
Hirsch said nothing works 100% of the time and that seasonality is a framework to overlay with other market inputs. He pointed to the October 31 fiscal year-end for mutual funds as a driver of September weakness and an October turning point.
He said that pattern will persist unless institutions stop operating on a quarterly basis. He did allow that the AI boom may soften the seasonal downside, as the tech boom of the late 1990s overrode the four-year cycle.
Inflation, bond yields and the split Congress risk
The 10-year Treasury yield was above 5% when we recorded, so I asked whether yields change his view. Hirsch said trend matters more than level, and that the move has been orderly.
He said inflation, driven by growth, two wars and energy prices, is the biggest risk to his outlook. He expects the Fed to have to listen to the bond market, and he said he likes hearing a quieter Fed.
Another headwind is the midterm election itself. Hirsch said a split Congress with a Republican president has historically meant returns of roughly 6% to 8%, versus double-digit returns when Republicans control Congress.
Is the market too concentrated?
Hirsch said concentration is less of a problem than the fear mongers claim, and that the market is broadening more than people realize. He pointed to smaller mid-cap software stocks, utilities and energy as areas that could benefit from powering the AI buildout.
He compared the AI leaders to earlier secular bull markets, which were also led by new industries. A generational change like this will be concentrated, he said, and that is acceptable.
Asked what would turn him bearish, Hirsch said it would take a systemic shock, such as an inflation spike, a breakdown in the Middle East or big earnings misses from companies like Micron and Nvidia. He called that scenario "a whole pond of black swans."
How Hirsch uses the best six months and MACD
Hirsch said his best six months strategy looks for a technical signal on or after October 1 before leaning into stocks. He uses a faster version of the MACD indicator, set to 8, 17 and 9, and looks for a crossover confirmed across the Dow, S&P 500 and Nasdaq.
Once the signal arrives, he said his newsletter focuses on ETFs tracking the Dow, S&P 500, Nasdaq 100 and Russell 2000, plus baskets of small, mid and large cap stocks. He said small caps have historically outperformed large caps from October through March.
He said he is taking bonds off the table, having sold some of a 5% yield position. When I asked what we might both be wrong about a year from now, Hirsch said "we weren't optimistic enough."
Listen to the full episode
Tune in to the full conversation with Jeff Hirsch on YouTube, Spotify and Apple Podcasts.
For more on market history, read why history says investors should not fear Fed rate hikes or record highs, and subscribe to the free Opening Bell Daily newsletter for a daily briefing on stocks, macro and Wall Street.
Opening Bell Daily is for informational purposes only and is not investment advice. The views expressed are those of the guest, and comments on specific securities, ETFs and trading strategies are not recommendations. Hirsch sells investment research through Stock Trader's Almanac.