As we all know, 2022 was a terrible year in the markets…
The benchmark S&P 500 Index lost more than 19%. And the tech-heavy Nasdaq Composite Index fell around 33%. Neither index had performed that poorly since 2008.
But importantly… we’re now in the early days of an incredibly “bullish” setup.
You see, something happened last year for only the ninth time since 1950. And every other time it occurred, stocks surged anywhere from nearly 11% to more than 34% throughout the next year.
When you combine this data with the “breadth thrust” indicator I detailed yesterday, it’s clear that we’re on the cusp of a major opportunity. And it’s pointing to 20%-plus upside in stocks this year.
Let me explain…
In short, 2022 was just the ninth “down” midterm-election year for the S&P 500 since 1950. And in each of the previous eight instances, stocks soared the following year.
It sounds like some kind of joke. But it’s not…
The midterm cycle is one of the most predictable in the markets. And now, we’re on the bullish side of this cycle.
You can see what I mean in the following table. Take a look…
In the previous eight occurrences, the average return in the year after the midterm elections was nearly 25%. That’s roughly four times the expected return from the stock market in a given year.
You’ll also notice something else important. Stocks went up at least 10% every time.
So while I may loathe the game of politics in general, the numbers are clear…
Passing the midterms is a major market milestone.
And a positive shift is playing out in the macroeconomic data, too. The official inflation numbers continue to improve…
The Consumer Price Index (“CPI”) appears to have peaked at 9.1% last June. It came in at 6.5% in December. So as long as the current downtrend doesn’t reverse, the CPI could drop below the Federal Reserve’s benchmark rate (4.25% to 4.5%) as soon as this quarter.
That could encourage the Fed to keep slowing (or even to pause) its interest-rate hikes.
Now, we’re only in the early stages of this shift. And that means it’s hard to figure out how high the next bull market could go. But we can use three historical metrics as guidelines…
The average rally from a midterm-election-year low has been 30%. The S&P 500 hit an intraday low of 3,491 in mid-October. So that would put the target range this time at around 4,540 – or about 13% gain from its current level.
The average rally when the midterm-election year finished down has been nearly 25%. And the S&P 500 closed last year at about 3,840. So that would put the target range this time at around 4,800 – or about 19% higher than its current level.
And finally, the average rally after a breadth-thrust signal has been 25%. With that signal occurring recently around 4,000 on the S&P 500, it would put the target range at about 5,000.
Remember, the S&P 500’s all-time high was just shy of 4,800 on the first trading day of 2022. So if all the conditions align perfectly… the S&P 500 could make a new all-time high.
Folks, our takeaway from yesterday and today is simple…
Last year was terrible in the markets. But we’re not living in the past. And moving forward, the numbers tell us that this year’s market offers a lot of bullish potential.
As always, we’ll keep an eye out for the most attractive opportunities as the market turns. And with the Power Gauge at our side, we’re sure to uncover the best stocks to own.
Good investing,
Marc Chaikin
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