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Reasons for Optimism

Things are not great at the moment. With data going back to 1976, this is the first time ever that both stocks and bonds are in a > 10% drawdown at the same time. This is the 9th time the S&P 500 is down 25% or more since 1950. The Nasdaq Composite is down 30% or worse for the 8th time since 1971. And the Russell 2000 Index is down 30% or more for only the 7th time since its inception in 1979. We are definitely in a full-fledged bear market. To fight inflation, the Federal Reserve is literally trying to make stock prices go down and housing prices go down. There’s war, inflation, currency crises, energy shortages and a global economy on the brink of a recession. It doesn’t take a genius to point out the bad stuff today. There are always terrible things happening in the world but never before has it been so easy to stay current on those terrible things thanks to the news, emails, texts, tweets, and Facebook posts. It’s easy to be pessimistic right now, so pessimism has become the default outlook on the world for many.

Former GE Chairman & CEO, Jack Welch once said, “Nothing of any importance has ever been accomplished by a pessimist.” I believe that optimists are better investors than pessimists. So let’s try not to be pessimistic, even if it’s not easy right now.

To balance out some of the current pessimism, I wanted to post some data that should give us reasons for optimism. History provides no guarantees for the future but we should find some comfort in knowing that when markets are down big like this historically, it tends to lead to very positive future returns. Take a look at the chart below. These are the forward one, three, five and ten year returns for the S&P 500 when it is down 25% or more over the past 70+ years. Pay close attention to the averages column at the bottom.

Need another reason to feel more optimistic over the short run? Voters head to the ballot box in less than a month on November 8th. Why is that a reason for optimism? Because the data is very clear: Midterm elections historically have been very bullish for the stock market. Since 1950 there have been 18 midterm election cycles, and in the twelve months following every one of those cycles, the stock market has had positive returns. That’s a pretty amazing stat and honestly, one that surprised me. In the year after previous midterms, US Stocks have delivered average annual returns of 18.6% compared to 10.6% in all other years. If we lookout two years after previous midterm elections, the average return has been a blistering 33.7%. Why are midterm elections such a bullish catalyst? Good question. Theories vary, but in my opinion it is because there’s a tendency for more gridlock in Washington following midterms. Midterm elections typically bring a more divided government no matter which party controls the White House. Wall Street tends to think gridlock is good because it means less legislative risk. Markets hate uncertainty and because of gridlock, legislative uncertainty tends to be removed after midterms.

Bottom Line: The stock market doesn’t fall 25 – 30% very often and when it has in the past it’s provided very good future returns when your time horizon is measured in years as opposed to days or months. Combine that with the historical returns of the market after midterm elections and there are reasons for optimism, even if it’s not easy right now.

As always, please feel free to reach out to me directly with any questions. Thank you for the continued opportunity to serve you.

- Brett


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