Why 2023 Should Bounce Back

We hope everyone had a great holiday season, and we wish everyone a safe and happy New Year!

• 2022 was a rough year for the markets, but it is rare for stocks to be down back-to-back years.
• Stocks tend to bounce back after negative years, and we expect that to happen in 2023.
• The well-known Santa Claus rally period is upon us, and how stocks perform could be a clue for January.

As bad as 2022 has been for investors, there is a silver lining. Back-to-back declines in the S&P 500 are quite rare.

Since 1950, stocks have only fallen in consecutive years during the vicious recession of 1973/1974 and for three years in a row during the tech bubble implosion of the early 2000s. Fortunately, we don’t see similar scenarios with the current environment, so the odds favor a snapback in 2023.

Taking a closer look at what we found:

• For the year after a negative return, the S&P 500 was up 15% on average and higher 80% of the time.
• For the year following a 10% or greater loss, the S&P was up 63.6% of the time but only 8.5% on average.
• Out of 20 negative years, returns worsened the following year only three times: 1974, 2001, and 2002.
• Big losses were rewarded. For the years following 20%-plus declines, the S&P was up 100% of the time and 27.1% on average. Those big years were 1975, 2003, and 2009.
• For the years following positive returns, the S&P was up 68.6% of the time but only by 7.1% on average, which is somewhat surprising. Take note the stock market gained an average of 9.5% since 1950 and was up 71.2% of the time.

 Time For Santa

“If Santa should fail to call, bears may come to Broad and Wall.” —Yale Hirsch

One of the most well-known investment axioms is the Santa Claus rally. Yet, one of the little-known facts about the Santa Claus rally (SCR) is it does not take place during the entire month of December. It actually lasts only seven days. Discovered in 1972 by Yale Hirsch, creator of the Stock Trader’s Almanac (carried on now by his son, Jeff Hirsch), the real SCR takes place during the final five trading days of the year and first two trading days of the following year, not just December. In other words, the official SCR started on Friday, Dec. 23.

It turns out these seven days indeed are quite jolly, as no seven-day combo is more likely to be higher (up 79.2% of the time) and only two combos have a better average return for the S&P 500 than the SCR’s 1.33%.

These seven days tend to be in the green, so that is expected. Fun trivia stat: The SRC has been positive for the last six years in a row and hasn’t had a positive seven-year stretch since back in the 70s.  The all-time record was an incredible 10-year winning streak in the 1950s and 1960s. The chart below shows all the SCR periods since the tech bubble and the S&P 500’s performance after each period.

The bottom line is what really matters to investors is when Santa doesn’t come, as Mr. Hirsch noted in his famous quote.

The following chart shows recent times investors were given coal during these seven days, and the results aren’t very good at all. In fact, the last five times the SCR was negative, January was down as well. There was no SCR in 2000 and 2008, which were not the best times for investors, and the lack of an SCR was potentially a major warning that something wasn’t right. Lastly, the full year was negative in 1994 and 2015 after no Santa. We like to say that hope isn’t a strategy, but we can admit we are hoping for some green this year!

Finally, the S&P 500 gained 9.3% on average since 1950 and was higher 71.8% of the time. But when a SCR takes place, those numbers jump to 10.5% and 73.2%, respectively, while they fall to only 5.0% and 66.7% when no rally occurs. This is only one indicator, and we suggest following many more to guide your investment decisions, but this is clearly a sign we shouldn’t ignore.

This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.

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