“I don’t see how this is going to get any better, until________”

We hear this every day. I get it. Investment markets are grim.

An otherwise productive US economy is being overshadowed by Inflation, Russia, and relentless interest rate hikes. Stocks are in a bear market.

The 17% summer rally in stocks was swept away through a few Fed speeches. It seems like they won’t be satisfied until a recession is here.

So… What should we do differently? How do we react?

“Stay the course” feels so dismissive and outdated. Nobody wants to sign up to take a repeated pounding in their portfolio.

As investors, we’re all in the business of silver linings; otherwise, we’d simply bury our money in coffee cans and stay home all day. There are a few potential catalysts coming up which might help the market get out of this mess:

Midterms

The correlation between stock market performance and midterm elections is hard to ignore.

In 17 of the 19 midterms since 1946, the market performed better in the six months after an election than it did in the six months before it.

The 1-year track record following midterms is impressive:

Takeaway: The market tends to like gridlock in Washington. We might be headed in that direction.

The Presidential Cycle

In 2016, Lee Bohl, a Charles Schwab researcher, analyzed market data between 1933 and 2015 and found that, generally, the third year of the presidency overlapped with the largest stock market gains.

The S&P 500, a fairly broad index of stocks, exhibited the following average returns in each year of the presidential cycle since 1933:

First Year: +6.7%

Second Year: +5.8%

Third Year: +16.3%

Fourth Year: +6.7%

Takeaway: The third year is a huge positive outlier- let’s hope that holds true for 2023.

Inflation

Year-over-year inflation is >8%. However, monthly inflation from June-August is flat. It’s almost like CPI put on a lot of weight over the holidays last year but really started to lean out this summer. That’s encouraging going forwards.

Takeaway: The way things are going, inflation should be back near 2% in Spring of 2023, if not sooner.

Interest Rates

The Fed continues to raise interest rates in order to slow down inflation. Making money more expensive to borrow and invest is a proven way to slow down the velocity of money. Unfortunately, the economy is often a short-term casualty in these situations.

Predicting interest rates has long been a fool’s errand. But if the economy is starting to cool off with inflation, I’d be willing to bet the Fed finishes their rate hikes in 2022. If there’s a path to achieve the proverbial “soft landing” for the economy, they’ll go for it.

Takeaway: Things are always changing in markets and economies. Jerome Powell had projected no rate hikes in 2022 last winter. There’s no reason to believe the Fed can’t change its mind again.

Earnings

Above all else, earnings drive company stock prices. So how are we looking for 2022? Earnings have continued to grow above the rate of inflation:

Takeaway: Valuations on stocks are attractive for the first time in a long time.

Market Returns After A Recession Are Significant

Per Fidelity research:

Takeaway: Stay the course is probably still good advice. If you sell during recessions, you miss out on powerful market recoveries.

Pullbacks Are Normal And Have Always Been Temporary

The market is always fighting something. They call it the “wall of worry” necessary to drive innovation and efficiencies in our world.

Some Silver Linings