US stock markets are closed today to celebrate Presidents’ Day, so the current trading week is shorter than usual. Nevertheless, times like this are useful for studying historical price movements and preparing for the next move.
Many investors fear a recession in 2023. After all, the inverted yield curve is enough to scare many out of the stock market.
But history suggests 2023 will probably deliver a positive return. At least, this is the conclusion after looking at a trifecta of the Santa Claus rally, the first five days of the year, and the January performance.
The S&P 500 is up 5.86% YTD when less than two trading months passed. The performance is nothing short of impressive, given where the funds rate went.
Despite rising yields, some investors continue to see value in the stock market. This is particularly true if we look at a trifecta that has always pointed to higher returns since 1950.
The starting point is a negative year. Therefore, this trifecta should be analyzed only after a negative return in the previous year.
In 2022, the S&P 500 index delivered a negative 19.4% return, so we can look at the three conditions that suggest further gains for the index.
First, a Santa Claus rally in the previous year. Indeed, looking back, the Santa Claus rally delivered 1.4% in 2022.
Second, the first five days of the new year must deliver a positive return. In 2023, the return was 0.8% over the period.
Finally, the January return should be positive for the trifecta to be in place. This January, the S&P 500 index delivered +6.2%.
This is the trifecta, and it has never failed since 1950. Every time the three conditions were in place, the stock market ended up the year in positive double-digit territory.
More precisely, after such a trifecta, the lowest annual performance was 10.8% and the highest 45%.
Summing up, history suggests more upside for the US stock market. If that is correct, it means that the Fed is closer to the terminal rate of this hiking cycle, which means that this week’s FOMC Minutes, as discussed here, might be bullish for stocks and bearish for the dollar.
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