Congratulations! You Made it to the Best Time of the Year!

November 2022 | Victoria Bogner, CFP®, CFA, AIF®

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Hello, lovely readers.  The air is crisp, the leaves are turning, you can buy Pumpkin Spice Pringles and…we started what is historically the most positive time of the year for the stock market.

That’s right, my friends.  October 28 – January 18 marks a time period that has been positive over 87% of the time since the late 40s.  We like to call it the Santa Rally in the financial profession.

This time period has produced an average annualized return of over 20%.  And my personal opinion is that this year won’t be an exception.  Here’s a few reasons why:

It’s no secret the stock market has seriously struggled in 2022.  The Nasdaq 100, an index of largely technology stocks, is down nearly 30% for the year.  Earnings haven’t been great this quarter.  Inflation is still a big problem.  Interest rates are going nowhere but up.  Housing is coming off its peak.  Things are worse now than they were in June.  And yet, the broad stock market is higher now than it was in June.  This is a big indication that the bad news up to this point has been baked into the cake.

We all know that things stink right now for the economy.  Bad economic news is everywhere you turn.  And it’s precisely when the news looks the worst that the market usually bottoms.

We’re also seeing a similar shift that we saw in June: smart money (institutional investors and big wig funds that have the power to move the market) are buying into growth as opposed to value:

The graph above is an indicator that was created by Tom Bowley, who is a market analyst.  It’s showing the ratio of aggressive stuff over defensive stuff during the day while the stock market is open.  As you can see, the overall trend has been moving higher since the low this ratio made in late May.  That means smart money has been accumulating what retail investors have been dumping.  It’s another key sign of a market bottom.

What I’ll show you last is an indicator called the Slow Stochastic.  It’s on the bottom of the graph above.  The top is showing the price of the Wilshire 5000, a broad US market index.  This graph goes all the way back to late 2006.

As you can see, the indicator on the bottom doesn’t drop to 20 very often.  When it does, as long as we aren’t in a severe bear market decline like 2008, it has marked a major market bottom.  The last time this indicator got as low as it was last month was March 2009, which marked the end of the 2008/2009 market decline.

Now, I’m not saying that the market is going straight up from here.  That’s not how the market behaves.  I do still believe we’re heading for a recession late next year or early 2024.  I think it’s going to be prudent to get more defensive at the beginning of the year.

But we are in a sweet spot for stocks right now.  The next three months has returned outsized gains historically, and I for one am not betting against it this year.

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