Ugly Year so Far - What I Expect from Here

Previous Close on 10/31/22: DJIA 32,733; S&P 500 3872

Even though October was a great month for the stock market, 2022 has been UGLY so far. Just a few weeks ago, the S&P 500 was off 25% for the year. Additionally, year-to-date, bonds have had their worst year in many decades. Truly an ugly year for investors.

So, what now? Everywhere one turns, terms like “unprecedented”, “frightening”, and “life-changing” are used to describe not only world events but stock market risks and outlook. What does history have to say at times like these? There are a few interesting tidbits to consider as we approach the midterm elections next week. Midterm election years tend to be volatile and negative – at least for the first three quarters of the year. This is due to uncertainty and angst among investors and the public at large. This year is no different. War (and threats of more), inflation, economic concerns, political crosscurrents – they’re all present yet again.

When we look back at midterm election years beginning with the first midterm after the end of WWII (and there were certainly “unprecedented” things at that time and since!), we see an amazing pattern. There have been 19 midterm election years from 1946 through 2018. On average those 19 times, the stock market was down YTD going into October. (That has certainly been true in 2022!) However, from Election Day going forward 12 months, history has a vastly different track record. Guess how many of those 19 times the market was up 12 months post-Election Day? If you guessed 19 (100% of the time), you are correct! Once the uncertainty of political control was addressed (at least for two years), the market adjusted and moved ahead. And by how much? Though the range is wide, those 19 12-month periods averaged +14.4%.

What do I expect? There is no guarantee that history repeats itself, but I’m convinced that the odds favor the S&P 500 being higher on November 8, 2023 than on November 8, 2022. I plan to mark my calendar to see! I’m also optimistic that my “Five-Year Rule” discussed in my June letter will continue to benefit our clients who follow it. (If you’d like another copy of that, please contact our office.) Of course, implementation is crucial to success so always live by “Herb’s Three Rules of Equity Investing” - own quality, be diversified, and invest in patience.

While the first part of 2022 has been unkind (to say the least) to the stock market, I’m confident that the future will eventually be bright once again – hopefully within 12 months. Until then, hang tough. We’ve survived many worse markets than this. It seems to me that now would be a particularly bad time to give up hope. If you’d like to discuss your personal situation, don’t hesitate to contact our office. In the meantime, mark your calendar!

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