Now let’s talk about “downward year”, or what I’ll call a Charlie Brown/Lucy football kick moment.  Just as we’re thinking that maybe the markets had made their bottom and were turning bullish, Lucy comes in and pulls the football (market) away and we have another downward turn.  And corresponding to the four quarters in football, the S&P 500 crossed above its 200 day Moving Average (red line) four times, in February, April, August and December only to fall back below.

So first let’s talk about choppiness, which is comparable to volatility.  One of the metrics we utilize is “one percent or more daily moves”.  All told, we’ve had 122 days with 59 up and 63 down.  As you can see in the table, this marks the high-water mark since 2016.  In 2017 we had only 8 occurrences, or less than 1/month.  This year we had about 10/month, or almost every other trading day.

So the question again is “What should we expect in 2023?”.  A positive is that Inflation peaked in June and has now decreased to 7.1%, while the 10 year Treasury yield is lower at 3.48%.  However, the answer may lie in the S&P 500 year after Mid-Term election year/Pre-election year returns.  Over the last 80 years (20 instances) the average return has been 16.09%.  The only negative return was -0.73% in 2015 and the highest was 34.11% in 1995.  The last one, in 2019, was 28.88%.  Those are pretty good numbers and maybe Lucy will let Charlie Brown kick the football in 2023.


2020 Year in Review - The “COVID Compression” Year

2021 is now in the books, and it is sure one that we will all remember.  2020 carried over into 2021 with COVID-19, then the Delta variant, and then Omicron.  On the enormous side, we have Apple with a market capitalization of close to $3 trillion, and Elon Musk had a tax bill of $11 billion.  We also saw the beginning of “pay-for-space-tronauts”, and inflation skyrocketed to 5.7% for the 12 months ending in November, which was the fastest increase in the consumer spending price index since July 1982.  On the plus side, initial filings for unemployment insurance dipped last week and remained close to their lowest level in more than 50 years.  However, through it all, the markets were bullish and the major indices finished with double digit gains.  What was quite remarkable was the steady advance of the S&P 500, which hit 70 new record closes this year, trailing only 1995′s 77 record closing highs.  Looking at this another way, the S&P 500 has posted at least one new record close every month since November 2020. What was also unusual was the lack of a market correction.  The largest S&P 500 drawdown was between the 2 September record closing high of 4536.95 and 4 October’s subsequent low of 4300.46, a drop of only 5.21%.  Also, the S&P 500 has remained above its 200 day Moving Average for the entirety of this year.  That has only happened four times since 1981, but in three of those cases the market declined the following year.  So what should we expect in 2022?  Looking at the “” four year election cycle chart, the Mid-Term election year (2022) is characterized by choppiness and lower returns.  Digging a little deeper, I looked back at the last Mid-Term election year in 2018, and the S&P 500 had daily moves of 1 percent or more 64 times with the down days exceeding the up days, 33 to 31.  2018 was also the last time the S&P 500 had a negative year.  So how does that compare to 2021.  Last year we had 55 such 1% moves, but in this case the up days handily beat out the down days, 34 to 21.  So yes, we’ve lived through volatility before, but I do think corporate earnings will have a major impact.  According to FactSet, the 2021 annual earnings growth rate was 45.1%, which would be the highest since they began tracking the metric in 2008.  Hopefully earnings will continue to be strong going into 2022, and this bull market will keep running to the upside.

Here we are, just closing out 2020, and this was a year we’ll never forget.  We started out the year with a bang, as the S&P 500 hit a new record high of 3257 the first day the market was open (please refer to top chart on the following page).  More records came over the next few weeks, and on 19 February the S&P 500 had its “13th” new high of the year, closing at 3386.  I’m not superstitious, but then it happened.  Coronavirus hit and our lives changed.  Suddenly the markets sold off culminating in the quickest fall ever.  Over the next five weeks, the S&P 500 dropped 34% closing at 2237 on 23 March.  This was historic, as it averaged just over a 1% loss each trading day.  In the throes of despair, the markets then reversed, starting the quickest rebound ever.  We kept fighting back, and on 18 August, six months after the sell off started, we made a new S&P 500 record high of 3389.  As 2020 closed out, we did have good news with the COVID vaccine becoming a reality.  That said, on the final trading day of 2020 the S&P 500 set another new record at 3756, something I would never have expected on 23 March.  Finally, I’d like to compare the 2020 market to 2019.  From a volatility perspective, the S&P 500 had 110 out of 253 trading days of closing up or down 1%, while in 2019 there were only 38 days.  Next, let’s compare 2020 to previous bear markets (lower chart on next page) to further emphasis the magnitude of this year’s market movement.  If you compare the blue lines of the two, they look very similar.  However, the bottom chart covers the 2008 bear market and seven plus years of financial fallout.  As mentioned above, the top chart war for only this year.  Putting it another way, we “compressed” seven years of movement into 2020, so it is no wonder we are a little exhausted as we finish out 2020.

Years in Review

In last year’s letter, we asked “So what should we expect in 2022?”  The answer was “Looking at the four year election cycle chart, the Mid-Term election year is characterized by choppiness and lower returns.  2018 was also the last time the S&P 500 had a negative year”, and boy did that ring true.  On the first trading day of 2022, the S&P 500 hit a new record high and from there the trend was downward.  Apple, Amazon and Tesla all had their 2022 high on 3 January and all hit their 2022 low’s this past week.  Additionally, Disney had its worst year since 1974 and Nike had its worst since 1997.  The overriding factor for this bearishness was inflation and the resultant rise in interest rates.  That said, when you have an environment of increasing rates, it does not bode well for the stock market.  In June the Year over Year inflation rate topped out at 9.1%, a 40 year high.  The 10 year Treasury yield started the year at 1.51% and topped out at 4.33% on 21 October, almost three times higher.  And the bearer of those rate hikes was the Fed.  Every time Fed Chair Powell gave the FOMC report, it was buckle up time.