Stocks tumbled last week, with the S&P 500 falling 2.1%. The index is now up 7.7% from its October 12 closing low of 3,577.03 and down 19.7% from its January 3 closing high of 4,796.56.
Last week’s sell-off came as the Federal Reserve renewed its commitment to fight inflation with increasingly tight monetary policy. (You can read more about why this has been bad for stocks here and here.)
Earlier this month, I shared a roundup of what 16 top strategists were forecasting for the S&P 500 in 2023, noting that this stuff has limited value for investors with long time horizons.
In their reports, some strategists shared their thoughts on the longer-term outlook for the market. They included Brian Belski, chief investment strategist at BMO Capital Markets, who argues that the short-term, cyclical bear market we’re experiencing represents a hiccup in a much longer-term, secular bull market.
“[W]e continue to believe that U.S. stocks are in the midst of a secular bull market,” he wrote in a Nov. 30 research note. “It is important to note that cyclical bears are not necessarily secular bull killers. In fact, there have been six cyclical bears during the previous two secular bull markets — four between 1948 and 1968 and two between 1982 and 2000 — and US stocks managed to continue their trek higher after each of these.”
Belski has been calling this a secular bull market for over a decade, and years of higher prices suggest he’s been nailing it.
Barring some big rallies in the coming years, 2022’s bear market seems likely to put a big dent in longer-term average returns. But by no means does this seem to spell doom for investors.
“Although the S&P 500 10-year annualized return may have already peaked, it has taken roughly six years during the two prior secular bulls for 10-year returns to make definitive moves below the 6.5% historical average,” Belski added. “From our lens, we see normalized and moderate gains in the coming years as more likely than losses.“
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Savita Subramanian, head of U.S. equity strategy at BofA, also sees positive, albeit modest, returns in the coming years. On a November 28 call with reporters, she offered a 10-year forecast of “+5% annualized price returns,” which would bring the S&P 500 north of 6,000.
She pointed to the S&P 500’s P/E ratio, a metric that has little predictive power in the short-run but a better track record in the long-run.
“The current normalized P/E of 22x implies 5.1%/yr annualized returns over the next 10 years based on the historical relationship,” she said.
So, even while many are cautious about the short-term, at least some are confident the longer-term averages will look a lot better. (And who’s to say actual returns won’t blow away those expectations.)
Everyone’s talking about a near-term sell-off. A contrarian signal?
Last week, I wrote about how many market experts predicted earnings estimates would be slashed further and that many saw that as bearish for stocks in the early part of 2023.
Barron’s new cover story, published Saturday, had this narrative right in its headline.
Belski and Subramanian have been among the strategists that have been warning of near-term weakness. But in recent days, both acknowledged the problem of that becoming a consensus call.
“I do think that we are going to go down and then up,” Subramanian said in a Dec. 7 interview with Bloomberg. “The problem is that is an increasingly consensus view. So I think the bigger risk heading into the first half is actually not being invested in equities.“
“We said coming into 2023 and in our year-ahead piece that the first part of the year would be weak and choppy,” Belski said to CNBC on Friday. “We seem to be pulling that a little bit forward. And so the pullback is already done in our view.“
“Everybody and their mother, brother, sister, cousin, and uncle is negative on the first half of the year,” he added. “ So we’ll come out and be a little bit different. I think the weakness is probably not going to be as long as everybody thinks.“
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The thing about certain risks is that the become less of a problem for markets the more market participants talk about them.
That said, at TKer we like to emphasize the advantages of thinking long-term when you’re investing in the stock market. As 2022 has confirmed very clearly, the short-term can be very difficult to predict, even if you know where the fundamentals are headed.
“Think about the long game, and don’t sell everything,” Subramanian said to Bloomberg. “I don’t think this is the time to be out of equities.“
A quick note about the ‘Santa Claus Rally’ 🎅🏻
I know we just spent a bunch of time emphasizing the importance of thinking long term.
But for fun’s sake, here are the stats for the “Santa Claus Rally,” the phenomenon where the S&P 500 tends to trend higher over the last five trading days of the year and the first two of the next.
“The S&P 500 posts an average gain of 1.3%,” Almanac Trader’s Jeff Hirsch writes. “Failure to rally tends to precede bear markets or times when stocks could be purchased at lower prices later in the year.”
I wouldn’t bet my portfolio on this, but I’ll admit it makes for some short-term fun.
