Published January 28, 2022
This week we are reviewing some interesting data from a recent presentation made by CFRA. The three charts tell a possible story for how this year will play out. First, after a strong year in the market in 2021, we have seen stocks hit a wall, tumbling hard throughout January. This selloff following a strong period is common, at least in the short-term. The table below shows the level of decline at some point in the year following a strong market. In every case, where the decline occurred in the first quarter of the year, the market subsequently recovered that decline, as denoted by the ‘1’ in the far right column.
Second, given that this is a midterm election year, history tells us that the market’s 2022 recovery might be delayed. The table below shows the average returns for the middle quarters of Year 2 of a presidential cycle are negative; the only two quarters that average below par. That history suggests market turmoil lasting through June. However, this weakness begets the very strongest period – the two quarters comprising and just following the midterm elections. Those two strong quarters kick off the best market performance of a president’s term. This is perhaps because the opposition party almost always picks up seats leaving government further stalemated, which markets tend to favor.
Third, the broader challenge this year is that inflation has ramped up. Periods of rising inflation tend to portend a bearish market as the chart below shows (periods of rising inflation in the red boxes; bearish market periods shown as the gray bars).
The markets have kicked off with quite a bang. The historical data tells us that we are more than likely in for much more of this volatile market behavior in the months ahead.
Investors endured another tumultuous trading week in stocks. The market opened with a ferocious plunge that sent the Nasdaq down almost -5%. Buyers came in to completely reverse the downdraft and leave stocks positive by +0.3% for the day. Another selloff Tuesday failed to bring in enough buyers to find positive ground. Stocks closed -1.2%. The highly anticipated Fed meeting Wednesday saw stocks give up a +2% gain to finish down -0.1% as investors were disappointed by the central bank’s “flexible” plan toward battling inflation. Investors seemed to be looking for more certainty regarding the timing and number of coming interest rate hikes. Stocks suffered losses again Thursday, this time with swings that were muted by comparison to earlier in the week. The S&P closed off -0.5%. Strong earnings from Apple (AAPL) Thursday night helped stock indexes find their footing Friday. A last afternoon rally left stocks higher by +2.4%.
A hugely volatile week for stocks left the S&P 500 (SPY) shockingly positive with a +0.91% gain for the week. The Nasdaq 100 (QQQ) came all the way back to flat with a +0.03% week. Smallcap stocks (IWM) lagged a bit closing off -0.88%.
Warm wishes and until next week.