Monthly Market Commentary

Moderated Optimism

Philip Blancato, Chief Market Strategist, Advisor Group

Markets have several reasons to be optimistic given the positive signals that have emerged in recent times.

Pre-election years have historically shown strong returns in the first half for the S&P 500, which bodes well for investors. On average, Q1 and Q2 of the third year of a presidential cycle have returned 7.4% and 4.8%, respectively. This trend can be attributed to the expectation of increased government spending as politicians seek to appease their constituencies and gain voter support. With the presidential election set to take place in 2024, investors can expect to benefit from this trend in the coming months.1

Strong performance tends to follow a strong January. Historical data for the S&P 500 shows that after a positive January, the rest of the year has been positive 86% of the time, with an average return close to 12%. Furthermore, after a January with gains of more than 5% following a down year (as was the case this past January), returns have ranged between 20% and 45%. This can be attributed to investor confidence that the market has bottomed out and is set for an upward trend. Additionally, the start of the year can work as a reset in investors’ minds, improving sentiment and looking for cheap companies after big corrections.1

The well-anticipated recession is also a reason for optimism. According to the Philadelphia Fed’s “Anxious Index,” which is the probability of a negative value for quarter-over-quarter real GDP growth, recession expectations are higher than ever. While it may sound counterintuitive, an anticipated recession can sometimes be less harmful to the market than an unexpected one. This is because investors have already factored in the expected downturn and are less likely to panic and sell their holdings.2

Lastly, history supports a strong end of the year. We have seen two consecutive down years on the S&P 500 only 7% of the time since 1925, and the average 12-month return after a negative year and after a negative midterm year are 13% and 20%, respectively.

Overall, the financial markets have reasons to be moderately optimistic. The positive signals from pre-election year returns, strong January performance, and a well-anticipated recession should provide investors with the confidence to increase their holdings and make new investments.

Nonetheless, it is important to point out the growing risk of extended restrictive monetary policy and potentially higher levels of interest rates than currently anticipated. On one hand, inflation appears to be stickier than expected; a 7-month downtrend in recent prints is certainly positive, but prices remain at levels well above the Federal Reserve’s target. On the other, the economy remains strong, boasting a historically tight job market, resilient consumer spending, and a stabilizing housing market. This combination could force markets to re-assess their expectation of a potential pause or pivot from the Federal Reserve and shift their focus to a “no landing” scenario, marked by a stronger economy but also consistently higher inflation. At this point, we remain cautious but intent on monitoring the evolution of primary indicators that can further illuminate the path of the inflation, economy, and potential Federal Reserve responses.

Economic Definitions

GDP: Gross domestic product (GDP) measures the final market value of all goods and services produced within a country. It is the most frequently used indicator of economic activity. The GDP by expenditure approach measures total final expenditures (at purchasers’ prices), including exports less imports. This concept is adjusted for inflation.

Federal Reserve (Fed): The Federal Reserve System is the central banking system of the United States of America.

Index Definitions

S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Disclosures

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.

The statements provided herein are based solely on the opinions of the Advisor Group Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Advisor Group or its affiliates. Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice. Advisor Group has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Advisor Group is not soliciting or recommending any action based on any information in this document.

Securities and investment advisory services are offered through the firms: FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., Triad Advisors, LLC, Infinex Investments, Inc., and Woodbury Financial Services, Inc., broker-dealers, registered investment advisers, and members of FINRA and SIPC. Securities are offered through Securities America, Inc., American Portfolios Financial Services, Inc., and Ladenburg Thalmann & Co., broker-dealers and member of FINRA and SIPC. Advisory services are offered through Arbor Point Advisors, LLC, American Portfolios Advisors, Inc., Ladenburg Thalmann Asset Management, Inc., Securities America Advisors, Inc., and Triad Hybrid Solutions, LLC, registered investment advisers. Advisory programs offered by FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., Securities America Advisors, Inc., Triad Advisors, LLC., and Woodbury Financial Services, Inc., are sponsored by VISION2020 Wealth Management Corp., an affiliated registered investment adviser. 5473601

1 So Goes January, Goes the Year? — Carson Group
2 First Quarter 2023 Survey of Professional Forecasters (philadelphiafed.org)
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