Our working hypothesis is that fear drives the market, and fundamentals act as the ‘scaffolding’. It doesn't get any more fundamental than sovereign-level economics; the government’s red ink = the private sector’s black ink. When the government spends more than it takes in (i.e. deficit), the private sector receives an accounting surplus which eventually, after a time-lag of one month or so, shows up in the stock market. Fellow contributor at Seeking Alpha, Alan Longbon, does a truly superb job of explaining the economic fundamentals of how macro fiscal funds operate, and we highly recommend his article on the subject. In this piece, we will lay out only what you need to know in order to invest the knowledge.
The chart below shows the federal budget surplus (taxing more out of the economy than putting back in) in blue, and deficit (putting in more than is taxed out) in yellow.
Notice that there are surpluses in January, April, and September. This yearly pattern of three individual months of surpluses is visible in the chart below over a longer time frame.
The next chart superimposes the S&P 500 onto the government budget profile.
In January, because the new budget is still not fully implemented, the government is taxing more than it is spending; mandatory spending continues, but discretionary spending has not started. This, literally, taxes capital out of the economy and produces an accounting surplus (spending less than is taken in) at the Treasury. The next two months, February and March, have a tendency to be weak, as the lagged effect of reduced federal spending works its way through the markets.
The markets have a tendency to bottom out in early April as tax season arrives and tax remittances are activated. This puts the government back in surplus. By this time, however, the government’s discretionary spending is implemented, and the stock market will have a tendency to increase until June, when, once again, the lagged effect of the April surplus is felt by the market. Perhaps this is the basis for the old market adage ‘sell in late May and go away’.
In addition to the effect of US government spending (increasing the M2), there is also an increase in G5 spending that is set to take place this spring. Since the US spending increase will be superimposed on top of the G5 spending, we expect a sort of “constructive interference” on the US market because a substantial amount of the G5 M2 ends up in US equities. US equities will get a 'double-whammy' of influx during the April to June time period.
Finally, in September, the government receives substantial revenues from payments of estimated individual and corporate income taxes which produce another accounting surplus. The usual time-lag of a month helps make October a popular month for stock market corrections, and November a good time to prepare for the Santa rally.
In conclusion, the idea is to increase long positions a month-or-so after a federal accounting surplus.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.