S&P 500: Is a Year-End Rally on the Horizon Against All Odds?
The S&P 500 pain trade continues to be higher into year-end. We made such a point in January, suggesting the 2022 correction was complete. Let’s review what I wrote, and then we will expand on why we believe the “pain trade” is higher over the next few weeks.
“From the bullish side of the ledger, the outlook for 2023 has statistical support for a positive outcome. After having a negative year in 2022, the markets were visited by “Santa Claus,” although very late, and the first 5-days of January turned out to be a positive return. As the table below shows, there are only a few periods in history where this has occurred, and each yielded positive returns in the following year.”
Since then, the market has rallied roughly 10% so far. However, as noted several times, this rally has not been broad-based, as denoted by the divergence between the market cap and equal-weighted indexes.
As we noted then, just because something has always occurred in the past does not mean it MUST happen this time. However, as investors, we must focus on statistical tendencies and invest according to the probabilities rather than the possibilities.
For example, the current sloppy trading environment over the last few months corresponds to the average pre-election year performance.
As we head into year-end, the historical probabilities of a year-end advance, particularly following summer weakness, outweigh bearish possibilities.
There are many possibilities bearish investors are betting on, which are unlikely to manifest themselves before year-end.
Each concern is valid, and many will likely manifest themselves in 2024. Notably, since most of this year’s market advance was valuation expansion, the markets must eventually correct to accommodate
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