There’s an old axiom on Wall Street that holds the most expensive words in the stock market are “This time, it’s different.”
I’m certain we’ll all read plenty of articles between now and year-end about how overbought and expensive stocks are or how long-overdue a correction is. But it’s historically a safe bet the market will drift higher between now and the new year.
Let’s put some facts on that forecast: Since 1950, the S&P 500 has logged a positive return between Nov. 15 and the end of the year 82 percent of the time. And there have been only five years in the past 67 where the broader market fell 2 percent or more in the final six weeks of the year.
When the Grinch has visited Wall Street, it’s generally been during a bear market such as in 1974 and 2000. There’s no bear this year, and it doesn’t pay to fight seasonality like that.
It’s been 63 weeks since the S&P 500 pulled back more than 2 percent, the longest such stretch since the mid-1960s. It’s only natural to expect we could see an up-tick in volatility and some profit taking in the New Year.
True bear markets usually don’t begin more than 12 months before the US economy enters recession. And conditions aren’t in place for an economic downturn right now. In fact, the US economy appears to be picking up steam as part of a synchronized global recovery for most of the world’s major economic blocs including the eurozone, Japan and China.
Long-time readers know we often use the US Leading Economic Index (LEI) produced by the Conference Board as a quick indicator of the health of the US economy.
The Organization for Economic Cooperation and Development (OECD) produces a similar measure for most major global economies. Unlike the Conference Board’s LEI, the OECD’s measure is released with a significant lag. But it’s still a useful 30,000-foot view of the global economy. Currently, the year-over-year reading for all three major developed economies is well into positive territory and/or accelerating to the upside.
This sort of synchronized global growth typically only happens two to three times each decade and represents a profitable time to own stocks.
With stock market valuations historically stretched, the global economy going strong, and the bull market in the S&P 500 entering its tenth year next Spring, signs are mounting that we’re entering the final innings of this expansion.
However, the final two years of market rallies have almost always started with stretched valuations. And yet the S&P 500 has historically rallied from those stretched points by an average of 58 percent, roughly 40 percent of the entire bull market return.
Until we see real risks in the US economy, market dips serve as buying opportunities.