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Keep Calm and Look Ahead

Volatility has cut both ways in 2023, lifting US and Global equities to new year-to-date highs in July before a pullback, which grew into an official correction in October. Yet, the bull market’s economy still looks good. Yes, there are plenty of spots with bruises, and broadly, sentiment is poor after the debt ceiling standoff and Fitch’s subsequent downgrade of the US’s credit rating, the rising US deficit, September’s US government shutdown worries, seemingly widespread US employment strikes, resurgent oil and gas prices, the resumption of US student loan payments, and the US Federal Reserve forecasts of higher for longer interest rates weighed on investors.

With all that said, no one discusses how the dour topics above do not have long-term market-moving ability and that economic conditions still appear better than most expect, especially in the face of continued governmental gridlock sapping legislative risk—a big positive. Another less-mentioned positive is year four of the US presidential cycle, which has a strong record of extending global political tailwinds into 2024. So, with politics largely gridlocked throughout the developed world and sentiment broadly dour, economic reality has a low bar to clear to beat expectations.

With pullbacks and corrections ordinary in bull markets, it still amazes me how much fear circulates when the market drops an “ordinary” amount. Equities endure a pullback of about -8% or worse every two years (since daily data began in 1928). More significant bull market corrections of -10% to -20% are also standard, with 35 occurring over the same period. While these pullbacks and corrections often repeat old fears and empower bearish media outlets, they fade away quicker than many investors recall. Example: one year ago, there was a near 100% consensus of an imminent US recession in early 2023. Now, a recession is barely talked about.

So, since this bull market began last October, high-quality growth equities have led global markets, which is somewhat unusual for a young bull market. High-quality growth equities with large global footprints and diverse revenue streams are what investors currently prefer. While this trend has persisted for some time, returns were mixed in Q3 2023, leaving some to ask if this will be a shift for small caps to regain ground. No one knows, but watch for all equities to climb and continue up through 2024.

While it is impossible to know when the bull market rally will resume, it can be fun to speculate. For example, since 1952, stocks have only witnessed August, September, and October down consecutively in a row six times in 70 years (1952, 1957, 1977, 1990, 2016, and 2023). All five previous events had a positive November, and four saw positive returns in December. Does this statistically mean anything? Not really, but it can help sentiment. Another fun fact: the S&P 500 is up 3.9% during November’s first three trading days. This run is the 5th best “first three days” ever for any November. This is also the 24th time the Russell 2000 closed at a 52-week low, then surged to its best 4-day rally in the 90 period after hitting the 52-week low. Sidenote: a year later, the small-cap index was higher 100% of the time, with a median return of about +25%. It is also good to know that 2023 witnessed the best first 7-month stock run in more than 25 years (since 1997)—making our current market correction seem due.

Moving through November, don’t let US political uncertainty cause you strife. Congress’s six-week delay on a government shutdown expires mid-November and will almost certainly set up another standoff and media Superbowl of pessimism. With the US House of Representatives ousting Speaker Kevin McCarthy in a surprise vote in early October and voting in Mike Johnson as the next Speaker plays perfectly into the public continuing to be disenchanted with the prospect of a 2020 presidential rematch between President Biden and former President Trump.

That said, the longer the status quo continues, the likelier a rematch becomes and the more discontent you should expect. This will build on the bullishness gridlock provides while still providing a divided Congress with the ability to grind out a compromise when necessary, as we saw with the debt ceiling and shutdown. But beyond that, Congress will only attempt to accomplish a little and will focus on winning voters in the 2024 elections. Without major legislation affecting property rights, taxes, and regulations, businesses can take risks and invest with confidence because they can make plans knowing business rules will not be changing anytime soon—a consistent yet largely underappreciated market positive. All of this helps calm the waters for equities and bonds through 2024.

In closing, it has long been discussed that to get an edge in capital markets, you either need information others don’t have easy access to or you need to interpret widely available information differently than the masses. So, don’t let a downturn, with the hallmark of a standard correction, sway you. Separate the noise from the signal to ensure emotions do not influence you, and remember, fear of false factors is bullish for capital markets.

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