Seasonality, Cycles, and a Fed That Can Sit Tight

Seasonality, Cycles, and a Fed That Can Sit Tight

• Presidential Cycle: Year Two volatility now, stronger tailwinds ahead.

• Gas Prices: Gasoline prices so far in line with normal seasonality.

• Inflation: CPI tracking its typical seasonal peak in March

The macro backdrop feels tense, but the historical playbook is holding up…

The investing backdrop right now is anything but stable. The situation with Iran has injected fresh layers of uncertainty. Investors are trying to handicap what comes next—whether the conflict widens and how long the geopolitical premium lingers in energy prices. Those variables will determine if the recent inflation pickup proves temporary or more persistent. It’s a combination that keeps markets on edge because it blurs the path forward for both growth and rates.

But there are three things in life that are certain: death, taxes, and change. Markets remind us of that last one every single day. The ground shifts, the narratives rotate, and the data forces you to stay honest about what’s working and what isn’t. That’s why in uncertain times I keep coming back to process. In a world where the certainties are so few, a disciplined framework is the only thing that keeps you anchored while everything else moves.

Given the recent market swings around the back‑and‑forth headlines of an intensifying conflict, and the potential for a deal, I thought now would be a good moment to check in on a few important topics: where we stand in the presidential cycle, inflation seasonality, and typical gas‑price swings. Looking at these items through a historical lens helps give me perspective.

But don't take my word for it, let's look at what the data's telling us...

Year Two of the presidential cycle is almost always a volatility machine. Going back to 1949, the S&P 500 Index typically bottoms in June before snapping back with a strong fourth‑quarter rally.

My work here is based on price returns using end‑of‑month closes. Through the end of March, Year Two usually shows a modest +0.6% gain. This year we’re sitting at –3.9%, which isn’t far off the historical script. For context, the worst March readings were 1978 (–6.2%) and 1982 (–8.6%). In other words, what we’re seeing now is well within the normal turbulence of a midterm year...

But the real story is what comes next. Years Three and Four are historically the sweet spot of the cycle. After the midterms, Congress is often split, which tends to limit policy swings from the White House. Markets usually interpret that as a stabilizer for both the economy and corporate earnings.

Year Three has delivered an average S&P 500 gain of 17.2%...

Year Four follows with an 8.1% advance…

On the consumer side, gasoline prices are behaving worse than expected. EIA data through the third week of March show the national average is up 10% compared to a year ago. That’s above the typical 7% seasonal rise for the month since 2000…

We want to think about these numbers on an annual basis because that’s the inflation measure the Federal Reserve cares about most. It’s worth noting that the 2025 monthly average price for a gallon of gasoline doesn’t fall back below the March average until October. That means if gas prices stayed at current levels, the pace of growth would ease moving forward, coming back toward typical seasonality.

On the inflation front, CPI has tracked in line with its seasonal pattern since 2000. Month‑over‑month growth has behaved on script so far this year, and March is typically the peak month for sequential CPI gains…

The latest estimate from the Federal Reserve Bank of Cleveland’s economic team is for a 0.6% CPI gain in March. That’s just above the typical 0.5% increase for the month.

When the March 2026 inflation data is released, the 0.2% rise from 2025 will drop out of the headline numbers. If the Cleveland Fed’s 0.6% estimate is correct, we could see an annualized CPI growth rate of 2.8% in March.

Now let’s think about the data relative to the monetary policy outlook…

The Fed typically sets borrowing costs based upon the real rate of interest or the effective federal funds rate minus the annualized rate of inflation growth. Because, when that number is positive, it means rates are weighing on prices. And when the number is negative, it indicates cheap money is boosting inflation.

At the start of this month, prior to the military strikes in Iran, the effective federal funds rate was 3.6% and annualized CPI was 2.4%. That implied a real rate of 1.2% and the potential for more rate cuts later this year…

But now, that outlook has changed. With oil and gasoline prices rising, the path for rate cuts looks far less certain than it did at the end of last month. However, it doesn’t look likely that our central bank will be in any rush to raise interest rates soon either.

You see, the current cushion in real rates means the Fed has time to sit and watch what happens. As I noted, the current real rate is around 1.2%. That means our central bank could cut rates by 120 basis points, or roughly six times, before it hits the neutral level where policy is neither weighing on or boosting inflation. Yet, it has managed real rates to an average of -0.6% since 2000. That implies that there’s really a 180-basis point cushion to support the economy.

But we want to think about the forward-looking levels. If annualized CPI hits 2.8% for March, that would mean real rates would drop to 0.8%. The change would mean policy is still restrictive. However, it also implies the Fed’s policy support cushion has shrunk to around 140 basis points based on the long-term average.

Based on the historical numbers, nothing we’re seeing right now is out of the ordinary. The stock market often stumbles out of the gate at this point in the second year of a president’s term, and both gas‑price growth and inflation typically peak in March before easing as the year progresses. And when you line up the data we just walked through, it’s clear the Federal Reserve still has room to let this geopolitical moment play out. The current cushion in real rates gives policymakers time to watch how the conflict evolves before they’d be forced into action in the form of rate hikes.

Five Stories Moving the Market:

U.S. allies in the Persian Gulf are inching toward joining the fight against Iran, getting tougher following persistent attacks that have disrupted their economies and risk giving Tehran long-term leverage over the Strait of Hormuz – WSJ. (Why you should care – Arab nations are discussing plans to seize previously untouched Iranian finances, potentially driving a wedge between the hardliners and the religious factions ruling the country)

Japanese Finance Minister Satsuki Katayama said the government ​is prepared to take ‌all necessary measures "on all fronts," following reports that the government is considering intervening in crude oil futures markets to bring prices down – Reuters. (Why you should care – Katayama is likely trying to talk down prices as intervention by the Japanese government would be short-lived)

Japan’s key inflation gauge slowed more than expected to its weakest pace in nearly four years as utility subsidies cooled energy costs; consumer prices excluding fresh food climbed 1.6% from a year earlier in February, the smallest gain since March 2022, according to the Ministry of Internal Affairs and Communications – Bloomberg. (Why you should care – while the drop is welcomed news, it’s unlikely to sway Bank of Japan policymakers to stop rate hikes, given the subsidy boost)

San Francisco Federal Reserve Bank President Mary Daly said ‌it’s ​not clear what the Fed's ​next move on interest rates will need to be, unless the Iran conflict resolves quickly and the ​Fed can simply "look through" ​a temporary increase in oil ⁠prices - Reuters. (Why you should care – Daly has been a steady advocate for rate cuts until these recent comments)

President Donald Trump said the U.S. would postpone strikes against Iran’s energy infrastructure after what he called “productive conversations” with the country, in comments that spurred confusion over the participants in the talks and parameters of a deal – Bloomberg. (Why you should care – the statement could signal a splintering of the factions ruling Iran)

Economic Calendar:

Earnings: AIR, GME, KBH, SFD, WOR

Japan – CPI for February

Japan – Au Jibun Bank Japan Manufacturing, Services, Composite PMI (Preliminary) for March

Eurozone – HCOB Eurozone Manufacturing, Services, Composite PMI (Preliminary) for March (5 a.m.)

U.K. – S&P Global U.K. Manufacturing, Services, Composite PMI (Preliminary) for March (5:30 a.m.)

U.S. – ADP Employment Change Weekly (8:15 a.m.)

U.S. – S&P Global U.S. Manufacturing, Services, Composite PMI (Preliminary) for March (9:45 a.m.)

U.S. – Richmond Fed Manufacturing Index for March (10 a.m.)

ECB’s Nagel (Germany) Speaks (11 a.m.)

Treasury Auctions $80 Billion in 6-Week Bills (11:30 a.m.)

ECB’s Lane (Chief Economist) Speaks (11:45 a.m.)

Treasury Auctions $69 Billion in 2-Year Notes (1 p.m.)

SNB’s Schlegel (Chairman) Speaks (1 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)

Fed’s Barr (Board Member) Speaks (6:30 p.m.)