As we said in our end-of-year blog, we look at market history to provide a roadmap for the year ahead as well as an outlook for points in time to look for potential changes in trend for the upcoming year. If one looks at the market statistics for the S&P 500 for the year 1962 (60 years back), the index hit a high on January 3rd @71.13 and a major low for the year on June 26th @52.32 which was a -26% decline with a secondary test of the low in late October. From high to low, it was a period of 174 days.
On February 7, 1960, the Kennedy Administration enacted an embargo on Cuban tobacco, seafood, fruits, and vegetables in retaliation for the failure to hold democratic elections on the island nation and the expropriation of US citizen/corporate property.
The index was stable until it began a descent in April 1960 when the market broke down from its trading range. The start of the decline coincided with President Kennedy’s April 11 news conference attacking US Steel’s six dollar/ton price increase particularly and the industry in general. (We recommend reading that dialogue as there are a few parallels to today). From April 11 to the date of the low was 76 days.
The backdrop news of the year was the heightened animosity between Washington, DC, and Moscow. Tensions were high and culminated with the Cuban Missile Crisis. That crisis lasted from October 13th to October 28th when the premier of the USSR agreed to remove the intermediate range missiles that had been installed in Cuba. That scare culminated with the secondary low for the year (a higher low test of the prior low). From there the market recovered as fear abated, but closed lower on the year.
The big low in June and subsequent higher low test in October was the start of a bull run that lasted through 1963. Both lows in 1962 were periods of intense fear: the first being the Kennedy/Big Steel war over prices, the second was the Cuban Missile Crisis. Today we see some parallels with that time period. Currently, Washington, DC, and Moscow are once again at odds with one another over a third country: Ukraine. 90K Russian troops are situated on the Ukraine border and appear ready to carve off a good chunk of that country. In 1961, interest rates had started to rise from what at the time were considered quite accommodative levels, much like this past year.
So what can we expect in the big picture for 2022 if the pattern repeats?
If the news breaks with the cycles (in this case a 60 year master cycle) and not the other way around, we would look for high in January with a low in June which would be the most significant decline for the year. If the amplitude is the same, 20% or more? Then a rally into August and a retest of the June lows in October. Then a move higher into the end of the year, maybe longer.
With the Fed accelerating its reduction of QE and the prospect of four rate hikes this year, the ‘punch bowl’ of the most accommodative monetary policy and the most massive Congressional fiscal policy in the last 70 years are being removed. The nation’s economy will have to stand on its own two feet for the first time since the 2009 bear market low.
With massive public debt as a percent of GDP, money printing ending, inflation more than transitory, higher interest rates and taxes rising, what could go wrong? Trade well and stay safe.
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