It’s not possible to time either the market or the economy and unwise to even try. Still, I am surprised how well the stock market is keeping up. I did not see this coming. Therefore, it is time to take a fresh look at where we are in terms of market returns and the economic outlook for 2023. Creating a certain sense of the more likely paths the market will take does not harm us and can make us better investors. This is a useful exercise that allows the smart investor to evaluate the accuracy and errors of past forecasts and to adjust the outlook based on recent data and events.
So, let’s sit back and look at 3 things:
1. The presidential cycle
2. The Fed’s action
3. “Expert’s” predictions
1. The presidential cycle
As we learned from posts before on this blog, we know that the stock market’s trajectory since President Joe Biden took office has been largely consistent with the historical presidential market cycle. In this cycle, the market tends to be up moderately in the first year of a new president’s term. It falls in the second year and puts in a bottom within a month or so of the midterm elections. In the third year the market then starts climbing again and performs best in this 4 year cycle. Finally, stock prices grow moderately in year four and remains positive.
In the current cycle under Biden, we saw the S&P 500 rise about 27% in year one. In year two, it was down about 20% and put in what looks like a bottom just weeks before the November midterm elections. So far, in this year three, the S&P is up almost 6%. That’s consistent with the historical cycle, which would suggest we’re in for a great 2023. Even better, according to the Stock Trader’s Almanac, since 1914 the average gain for the Dow Jones Industrial Average from a president’s midterm-year low to third-year high is 47%. Right now, the Dow is up about 16% from its late-September low, which suggests this rally has room to run.
2. The Fed’s action
Markets react on what the economy does and how the Federal Reserve reacts to it. But that is constantly changing according to available economic data. The main data market participants react to, are inflation, unemployment and new jobs added, GDP growth, etc. Of curse, nobody can predict how the data will look in the future but the current data support a positive outlook.
Inflation is still high, but inflation is coming down. The Fed’s preferred measure, the personal consumption expenditures price index, was up 5% year over year in December. That’s the smallest increase since September 2021. So, the trans is down. At the same time, unemployment is very low, at a rate of only 3.4%. It shows that the labour market is very robust despite the Fed’s drastic interest rate hikes of the past 12 months. Additionally, the labour force participation rate, continues to move slightly up.
3. “Expert’s” predictions
There is no shortage of so called expert’s predicting we will go into recession and markets will tank. Again, nobody has a crystal ball and can predict where the markets go. Our “expert’s are mainly wrong and a lot of this “news” is already in the markets. Contrarians will see a lot of upside potential here, when things turn out different than the majority predicted. And if not? We should see it as buying opportunities because over the entire history of the stock market nothing has been able to divert it from its relentless long-term upward climb.
Currently, it is wise to sit back and evaluate the situation and position accordingly. In this situation, I would not bet against the market. History shows, it is not a good idea. Especially, when there are a lot of signs that support a better than predicted outlook.
Sven Franssen