These are times that make investing scary. Investors begin to question whether stocks will ever stop going lower. They fear that inflation is back and therefore corporate profits will evaporate. One half of the population fears the President and his policies. The other half fear the Republicans in the event the election goes their way in November. Everyone is concerned that the Federal Reserve will raise rates too much and send us into a recession. The same people fear they will not raise rates enough and inflation will stay at 8% forever. The war between Ukraine and Russia feels like it will turn into a modern day “100 Year’s War”.
Whether the worst version of these fears becomes a reality, the stock market is pricing it in as we speak. It is what the stock market does. It discounts the future. The bigger the “question marks” surrounding the economy the bigger the discount. This is where we find ourselves when it comes to stocks.
The selling that continues to happen in stocks has not run its course. This is OK. It is what must happen from time to time to set the stage for the next rally. What we focus on here at KIG is determining what is the same about this decline to others and what is unique. We want to identify the sectors, industries and individual companies that are suffering unjustified punishment from investors. These are the stocks that we think will perform strong after this bear phase is over. It is markets like this where wealth-creating decisions by investors are forged. We apply our experience and understanding of markets to finding these opportunities.
We have been calling for high volatility since the beginning of the year. This volatility will not subside soon. This is what it feels like to go through a bear market. While every day feels like a year during a bear market, they do end, and stocks will recover. Investors who own portfolios of high-quality stocks with profits, positive cash flow and strong management have the best opportunity to limit the pain and maximize their results. While past performance does not predict future results, owning stocks in high-quality companies has rewarded investors.
In previous letters, we have pointed out that mid-term election years tend to be tricky for stocks. We continue to believe this year will follow suit. Below we look at a few charts we think line up with our expectations for 2022.
In the first chart, we see how stocks have performed during the 16 quarters of a presidential cycle. As you can see, the 2nd quarter of the 2nd year of the presidential cycle has seen the worst performance for the S&P 500® Index (“SPX”) while the 3rd quarter of the 2nd year has been the 14th worst performance. Interestingly, the next three quarters are the 6th, 2nd, and top performing quarters, respectively. Past performance does not predict future results.
In the next chart, from Bespoke Investment Group, we see how the SPX has performed in all years (blue line), in mid-term years (red line) and in all years with the mid-term years removed (gray line). Historically, during mid-term years, the SPX has performed poorly from late April through late October. From late October until the end of the year, the mid-term years have seen the best performance. This lines up with our expectation that the 4th quarter of this year will see strong performance from the SPX. Past performance does not predict future results.
The third chart comes to us from Charlie Bilello of Compound Capital Advisors. In it, Mr. Bilello looks at years that have seen the worst performance for the SPX during the first 88 days of trading. Following the 7 worst starts, the remainder of the year was negative only once. That year was 1941. The United States entered World War 2 later that year. The average gain from Day 89 through the end of the year for the other 6 years was over 16%. The current year of 2022 ranks 2nd on this list of worst starts since 1928. We will need to wait to see how the rest of the year plays out. Past performance does not predict future results.
So, for those who feel like the end of the world is near, take a breath. We think reports of the world’s demise are exaggerated. With the weather turning warm, COVID receding, and the Indianapolis Motor Speedway open for business here in Indiana, we suggest clients enjoy rest and relaxation rather than paying attention to Wall Street. Leave the worrying to us.
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.