Seasonality is often an important consideration in your asset allocation. So far in 2018, the seasonal pattern has not held at all. The market was strong in January, August and September, where history suggests weak markets. So far in Q4 that is an historically strong period, we have seen nothing but failed rallies.

The odds are still very good that markets bounce into yearend, but the celebration may just be that the bear has not shown its paws yet. Last week David Rosenberg suggested we already had one foot in a recession. He might be right, but we also expect the Federal reserve to massage the flattening of the yield curve. There is a significant focus in the market on the slope of the yield curve and what it means for main street. An inverted yield curve tells us that banks do not make money lending and traditional credit lending starts to contract.

A break and weekly close below of the February lows for the broad US markets (S&P 500 2532.69) would confirm the recession is playing out and confirm the double top that 2018 portends. We do not see that happening until we get more than speculation out of the Chinese trade fight. And that might be some time in Q2 unless we are surprised by a new trade deal that includes China no longer stealing US IP. It will be tough to get there, but the odds are not zero. Positive news on the trade front should help between now and whenever President Tariff Man decides he’s had enough. We will likely find out in a tweet on a Sunday night.

The 2000 peak, the end of the last major bull market, fueled by falling interest rates and the birth of the internet, saw very poor seasonal patterns in Q4 as well. Odds that the bear has started is pretty good. We should still see a bounce from the current oversold levels, but new highs are a much lower probability. In 2000, we saw the break of the early year low officially kicking off the pattern of lower highs and lower lows. For now, we are not there yet.

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