Clearer Skies Ahead?

Ryan Hastie, CPFA® |

Fiscal year 2022 will undoubtedly go down in the record books as one of the worst years for the investment markets. According to Financial Times, it was the worst year for a mixed asset portfolio since 1932, in the depths of the Great Depression. Throughout 2022 and continuing into this year, we have been inundated with “bad” news – inflation, rapidly rising interest rates, supply chain disruptions, geopolitical war, tension in Washington, etc. These are very real and significant issues that Americans see and feel every day. Unfortunately, we have no way of knowing or guessing what the future holds. So, rather than guess, sometimes it can be beneficial to look back in time. Looking back throughout the history of the investment markets, we have seen record highs and record lows (i.e., 2022). One thing we do know for sure, markets always recover – it’s the time it takes to recover that can be the most painful, even unbearable at times. Looking back can also give us a historical perspective of current events. To that end, let’s look at some historical data that potentially points to 2023 being better for investors than last year.

Data from FactSet shows stocks have historically reversed course following down years. In 18 time periods from 1950 – 2018, the S&P 500 has gained an average of 15%. The S&P 500 also saw positive returns in 15 of those 18 periods. Conversely, there were only 3 instances of consecutive negative years: 1973, 2000, and 2001. On average, following a loss of 20% or more, the S&P 500 has gained 17.6% the following year.

Additional data from FactSet points to a potential comeback of sorts for 2023. Since 1950, stocks have historically risen, on average, 14.7% in the year following a midterm election. Politics aside, the results of November’s midterm election was good for the market. Following the recent midterm elections, we now have mixed power in Washington –with Democrats holding the Oval Office and the Senate, and Republicans controlling the House. This “gridlock” has historically been good for the stock market, as it will be harder to pass any legislation without bipartisan support. Fewer bills typically translate to less surprise for the market – which it favors. Fewer surprises typically mean less volatility, which we saw plenty of last year.

The partisan makeup of the White House and Congress has also seen some differing effects on the market and stock returns. Going back to 1951, a Democratic President with a Republican or split Congress (our current composition) has seen an average total return of 17.5%, compared to an overall average of 12.5%, according to FactSet. Whatever one’s political preference, we can all cheer and hope for better performance for the investment markets.

Although past performance is not indicative of future results, these historical averages point to a potentially brighter year after the devastation experienced in 2022. January saw a strong start to the year, with all three major averages up for the month. Since then, the markets have seen persistent volatility due to fear of not only continued Federal Reserve (Fed) action, but potentially more aggressive action. Upcoming Consumer Price Index reports and Fed meetings will give us a look into the state of the economy and the effects of the Fed’s actions on decades-high inflation.