Ignore the doomsayers - things are looking bright for the bulls
Everywhere you look there seems to be bad news, but if past trends are anything to go by, 2023 could be a bumper year for equity returns says Dominic Frisby
“As January goes, so goes the rest of the year,” is the wisdom, and January is going rather well. So far. Here in Britain the FTSE 100 has broken out to all-time highs. In the States, the S&P 500 is up 5% for the month.
With all this in mind, here is a cool stat I wanted to share with you - one I just learnt from JC Parets over at All Star Charts.
If you get, first, a Santa Claus rally - that would be a rally in the S&P 500 over the week between 23rd December 23 and 4th of January - then a positive first five days of the year, and then a positive January, you have what Parets calls “the Trifecta.”
(Note by the way there was no Santas Claus rally in the years going into the big crashes of 2000 and 2008).
It’s only January 26. There is another week to go. But barring a major turndown over the next few days, it looks like we have Parets’ “Trifecta”.
We got a 0.8% Santa Claus rally - doesn’t sound like much, but Parets argues it is “more than three times the historical returns for all the other seven-day periods throughout the year.”
US stocks rallied another 1.4% in the first five days of 2023. And things, as we have already noted, are looking good for a strong January overall.
So here’s the stat that will get bulls salivating.
“Since 1950, whenever the S&P 500 has completed the Trifecta coming off a down year, the stock market has never been down. And it's up almost 27% on average, more than three times the average annual rate of return for the S&P500.”
27%? I’ll take that!
You don’t get these trifectas very often, by the way.
The US Presidential Cycle could be good news for markets
Here’s some more bull food.
We are coming into the third year of the four-year US Presidential Cycle - the year when the powers that be try to get everything looking hunky dory in time for the next election. They are normally very good years for stocks.
Don’t believe me? Charles Schwab researcher Lee Bohl has analysed market data since 1933 to find that the strongest market gains came, in general, with the third year of the presidency. Here are the average returns in each year of the presidential cycle between 1933 and 2015:
- Year after the election: +6.7%
- Second-year: +5.8%
- Third-year: +16.3%
- Fourth-year: +6.7%
Note that 2019, President Donald Trump’s third year, saw a 27% rally, which would carry the above averages even higher.
Between 1933 and 2022, the stock market saw gains in roughly 70% of calendar years, says macrotrends.net. But in year three of the presidential election cycle, that rises well over 80% of the time. We like 80% probability rates.
The portents then are very good.
But, but, but … the economy, the war in Ukraine, China, inflation, Russia, political uncertainty, political division, social unrest, the bear market blah blah.
Markets don’t care about that stuff - except when they do. They are tired narratives, anyway, and they are all “priced in”.
For now, the easiest direction of travel is up.
The trend is your friend
Here’s one final bit of bull food.
The S&P 500 peaked in early 2022 and trended lower for the year - with occasional rallies.
But it seems to be just breaking above its falling trend line, as the chart below isolates.
This kind of signal might not mean much in isolation, but coupled with everything else, you’ve got to say things are looking up.
Trend-followers will also have observed that all the short- and intermediate-term moving averages - over say seven days, 21 days, 55 days, even 144 days - are now sloping up. The S&P 500 has broken above its 200-day moving average. It won’t be long before that turns up too.
In other words, we have a new uptrend in place. Trends are powerful things. You might have heard me mention that once or twice.
So whether it’s the technicals, the cycles, or the historical patterns, there are lots of reasons to be bullish for the year ahead. After the year we have just had it’s hard to feel that way - it’s far easier to be stuck in a negative mindset, just as perhaps we were too slow to get into a negative mindset at the onset of the bear. But your author reports nevertheless on what he sees.
On the other hand, it might, for example, be worth pointing out that we are still below where we were in early December.
And that, as always, there is a lot that can go wrong in the world.
But, for now, it’s a Wednesday morning and I’m feeling bullish.