High inflation and fears of recession. Interest rate hikes from the Fed. Divided US politics. Regional war abroad and global consequences. I’m not talking about 2022 – I’m talking about 1966.
A common set of fear stocks in the year that gave us the Chevy Camaro, the NFL-AFL merger and “how the Grinch stole Christmas.” But a year later, 1967 brought not only the “Summer of Love,” but also a spectacular stock rally as the economic panic faded. The year was 1966. Expect a shocking, 1967-like bull market next year.
Markets are often prone to surprises – gaps between expectations and what ends up happening. When political, cultural and economic fears are overwhelming, even small positive things provide strength. Anything worse than fear causes bullish relief. Bear markets create extreme pessimism by nature.
In 1966, the S & P 500 endured a small bear market – 22% of the way that began in early January and bottomed out in October (yes – just in 2022). The war in Vietnam escalated. Major social and infrastructure legislation was added to the mid-term elections. The disdain for President ‘LBJ’ was different, but in many ways parallel, to the opinion of many voters for President ‘Brandon’. Inflation is rampant. So the Fed has increased short-term interest rates – less than now – but by historical standards very, very slowly and alarmingly.
Fears of recession reigned. Bears like to talk about “capitulation” – that panicky, violent, cascading selloff that usually ends a bear market. They liked to talk about it in 1966, too. But submission did not come. Instead, October ushered in a new bull market, with stocks rising as they rose this quarter. After a 6% fourth-quarter decline, stocks rose 24% in 1967.
The sentiment in 2022 was – and still is – negative when it comes to stocks. Almost all tests show excellence, such as the American Association of Individual Investors’ gauge of retail investors. The University of Michigan’s Consumer Sentiment Survey is hovering near all-time lows—which only happens when high prices wrap up. A recession in 2023 is highly anticipated. Fully 68% of respondents to the Bank of America Fund Manager Survey expect one.
The truth is bright. A large minority expected us to be in a recession last quarter. But third-quarter US GDP grew at a surprisingly strong 3.2% year-on-year, reversing a double-quarter decline (tempered by changes in goods and imports). Almost all other major nations saw positive, improved GDP growth.
However, consensus on recession expectations grew. This, mind you, was not a bad thing at all. The more firms anticipate a recession, the more they prepare. Companies have spent this year cutting inventories and headcounts. As a result, the recession has slowed down, and if it does come, it will be weaker than it would otherwise be. Warning is a reduction.
Likewise, the CEOs of almost every major bank – from Jamie Dimon to Jane Fraser – have openly, long and often, dismissed the US economy and predicted a recession. But recessions often bring higher default rates on their loans, driving up wages. If these banks were really afraid of default, these banks would surely have already written off their loans.
They didn’t. As I noted in this column on December 13, US loan growth reached 11.8% year-over-year, up from the end of 2021 by 4.0%, indicating monthly growth not associated with an impending recession. Ditto for global credit growth, which has grown every month since March.
Are you scratching your head? Look at what banks do, not what they say. What they say is emotion. What they do is true.
And the Fed is hiking? Everyone thinks they are killing the economy. Usually, they do. But every time they raised rates this year, loan growth increased rapidly. Why? Because the profit of borrowing money from banks in the future increases now with the increase in prices. And when you borrow, the borrower spends. They don’t dwell on it. Historically, bank borrowing costs have often been in line with overnight bank borrowing costs controlled by the Fed. Not now, as I noted here on Dec. 13.
For that reason, today’s fears of an “inverted yield curve” – 3-month Treasury yields above the 10-year rate – are overblown. In September 1966, the Fed also inverted the yield curve. However most of the reversal came later, after the stocks were low, like this time. And no recession.
Politics? Like 1966, 2022 was a midterm election year. As I explained in this column on November 16, the midterms create a rocket fuel market – an average of 18%-plus returns during the three years of US presidential terms. They were stronger, by an average of 28%, when the second year was absent, such as 2022 and 1966. Shares increased by 24 percent in 1967.
Unlike 1967, 2023 bond returns should go well, outpacing 2022 as the inflation risk of 2023 falls, as I noted in this column. Long-term interest rates will be worth that lower risk.
Regardless, I hear what you’re saying: 2022 has not been pretty. Infidelity sounds like a safe, comfortable bet. But maybe it does happen if people have been expecting the worst for long enough.
As we ring in the New Year, I would suggest that we prepare a surprise instead. I can’t promise another “Summer of Love” in 2023 when it comes to sex, drugs or rock ‘n’ roll. But I believe that the New Year will bring a strong stock market around the world.
Ken Fisher is the Founder and Executive Chairman of Fisher Investments, a four-time New York Times best-selling author, and a regular columnist in 17 countries worldwide.