-By Charles Brown, M.Brown Financial Advisors
-July 10, 2023
We are now halfway through 2023 and investors are wondering what comes next? The S&P 500 is now up 16% on the year, in spite of significant bank failures and debt ceiling drama. Let’s take a look at some charts** that can give us some perspective.
Bear Market Rally?
First we have a chart that shows all of the bear market rallies since 1929. As the S&P 500 has bounced off it’s October 2022 lows, some market prognosticators have dismissed the rally – calling it a “bear market rally”. Bear market rallies are defined as a large, quick move up in price off of a recent market low that fails to gain momentum with the market eventually moving back down to new lows.
We can see that most bear market rallies only last a few months and average a 20% to 30% retracement of the initial bear market selloff. Only a handful of bear market rallies get to the 50% retracement mark. The current rally in the S&P 500 now has a 64% retracement of the 2022 selloff. If the S&P 500 does go back down to the 2022 lows, this would be the largest retracement since 1929 to do so. It would also be one of the longer bear market rallies in that we are now 9 months from the 2022 low – bear market rallies tend to be short, not long. Since this bear market rally does not look like past bear market rallies, is it possible that this isn’t a bear market rally but the start of a new bull market in stocks?
IF we are in a new bull market then how much further could stocks rise? After all, the S&P 500 is already up 16% this year* – maybe the best gains are behind us.
This data set shows us S&P 500 returns in years where the index was negative the prior calendar year AND was up 10% or greater after the first half of the following year. This is exactly the situation we are in now as the S&P 500 was down 19% in 2022 and is now up greater than 10% through June of 2023. We can see from the data that average future returns were very good when this scenario has occurred in the past. Six month returns were +11.8% on average with a hit rate of 90% and one year returns were +14.4% on average with a hit rate of 90%. Long story short: history suggests future returns for investors could be nicely positive even though we have had a good start to the year.
Will the market have a smooth ride for the remainder of the year? This chart says otherwise.
This is a seasonal chart of the VIX which is a volatility index. Higher numbers mean elevated market volatility and lower numbers mean less market volatility. The dark grey line shows the average price of the VIX throughout the year, for all years, between 1990 and 2022. We can see from the dark grey line that the VIX tends to slowly drop from January into Summer. Volatility then tends to pick up significantly late in the Summer and into October, where it tops out and declines into year end. The red line is the actual movement of the VIX in 2023 – we can see that other than the banking scare in March of this year, the VIX has followed it’s historical seasonal pattern closely. Will we have smooth sailing and low volatility for the rest of 2023? No one knows. But this chart tells us that we should not be surprised to see increased volatility later this year.
*Thanks to Fidelity, Carson Investment Research (@RyanDetrick) , TopDownCharts and Callum Thomas (@chartstorm) for links to these charts.
**The above article is informational in nature only and is not a recommendation to buy or sell securities. All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information. All investments carry a degree of risk. Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.
***Securities and Advisory Services offered through Ausdal Financial Partners, Inc., an SEC registered investment adviser, member FINRA & SIPC. 5187 Utica Ridge Rd., Davenport IA 52807, 563-326-2064, www.ausdal.com. Sub-advisory services offered through M. Brown Financial Advisors, a registered investment adviser with the state of Illinois. M. Brown Financial Advisors is located at 2728 Forgue Drive, Suite 100, Naperville, IL 60564, 630-637-8600. M. Brown Financial Advisors and Ausdal Financial Partners are unaffiliated entities and only transact business in states where they are properly registered, or are excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission or any state regulators. Ausdal Financial Partners, Inc. does not accept buy, sell or cancel orders by email, or any instructions by e‐mail that would require your signature. Information contained in this communication is not considered an official record of your account and does not supersede normal trade confirmations or statements. Any information provided has been prepared from sources believed to be reliable but does not represent all available data necessary for making investment decisions and is for informational purposes only.