After a challenging time for most stock market indexes in August and September, the seasonal October low happened a bit later than we expected. We had noticed a pattern where the market lows for the Fall season tended to happen in the first half of the month, as they have almost always since the 2008 financial crisis. However, this year was slightly different as the broad indexes continued down into the last week of October before “catching a bid” and having a strong rebound rally, even stronger than we had hoped for in November.
But now, seasonality suggests that while November is a solidly positive month (and so far, so good), the first days of December can tend to be the start of a small pull-back before getting into the “Santa Clause Rally” season – which includes the days following Christmas, not leading up to them as so many clueless pundits are saying.
To add another layer of complexity, we are in the 3rd year of the Election Cycle. Based on data from Seasonax, this year had an 86.96% chance of being up overall with an average return of 11.22% in the S&P 500 since 1928. Those are not bad odds, and even with a possible pull-back in December, the market environment seems to be acting as expected and right on schedule.
Next year, an Election year, also has a good chance of success in having a positive year 73.91% of the time since 1928. However, the expected return of 5.08% is about half of what is predicted for a third year of an election cycle (Seasonax data).
In this environment, traditional diversification is still doing investors no favors. Small Cap funds are barely above break-even as we enter into the final weeks of 2023. If you haven’t been concentrated in Large Cap Growth or the NASDAQ 100, you likely haven’t made much progress this year. And Bonds too have not helped much in managing risk, as I’ve mentioned in previous newsletters. But we think we’re now in a longer rising-rate cycle, which we haven’t seen for decades. Those who will suffer most from this environment are those trusting their retirements to Target Date funds – Mutual Funds that move the allocation more and more into the bond market as investors get closer to retirement. We think this is a slow-motion train-wreck that many investors aren’t ready for.
Have I mentioned the Yield Curve is still (yes, still) inverted? Yep, it still is. Why do I care so much? Because historically when it is no longer inverted, we’re on a 12 to 18-month path to recession. This will be important for later – and all seems to be lining up to bottom around 2026. Why is THAT important? It is the expected date of the next Real Estate bottom (remember the 2008 Financial Crisis, the 1990 Savings & Loan crisis, the 1970s Stagflation and rising interest rates, etc.).
Our Shadowridge Long-Term Trend indicator went positive around the middle of November. Last month a bounce was expected since the data was so stretched beyond its averages. The current conditions do lean positive and have room to get stretched to the up side, so we could continue to see a positive market in December.
Our Mid-Term Cycle signal turned positive on November 1st and has remained strong throughout the entire month of November. This was a key factor in deciding to get back in to the market this month.
As of Wednesday night (November 22nd, 2023) our Shadowridge Dashboard showed Positive to Negative market sectors as 10 to 1. Energy has remained the weak sector in November, while many other parts of the market finally had a recovery. As we said last month, we wanted to see more sectors move to the positive side for us to be more invested… and it did, so we did.
For this month’s chart, I want to highlight a factor we use to both take profits and re-fill our investors “Cash” buckets. We do this to make sure our clients in retirement have enough cash on hand to meet their distribution needs, and it has worked quite well for our investors.
When our Money Flow calculation has an extreme spike (noted with Green lines) as it did at the end of last week, we go through each client account, taking the “profits” to re-fill their “cash bucket” with 1 to 2 years of income (based on investor risk level and needs). What I like most about having this process is that we can make cash available when it seems most prudent, rather than many advisors who just pull money monthly, equally out of investments. It helps make our portfolios more resilient and able to meet clients’ cash needs over all types of market conditions by not forcing us to sell investments while they are down or worse, at lows.
Two Year Chart of the S&P 500 with Money Flow Signals (Source: StockCharts.com)
The volatility and risk of the Bond market has been higher than what is normally expected – especially the Aggregate Bond Index and the 10-year US Treasuries. Both indexes have jumped up over 4% since mid-October but both are still positive on the year but less than 1% YTD (FastTrack data). Even with these big recent jumps, we’re still not convinced that is where we want to park money. At least not for more than a “trade” of a few days or weeks. So, we continue to opt for much lower volatility of short-term investments in the Bond market. This has helped us to greatly reduce the volatility of this year and we expect that to continue over the next 6 months or so.
Bottom Line: After playing it safe in August and September while the market fell, we did get back into the market aggressively at the beginning of November. But now, Seasonality favors having more money exposed to the stock market and we are participating as much as our data suggests we should. We do have our eyes on the first half of December since it has a tendency to be more flat, but going into the last couple of weeks of the year, we expect market movement to be favorable.
Wishing you a safe and enjoyable holiday!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.