By Lucas Downey, Contributing Editor, TradeSmith Daily
2023 offered a masterclass on the value of financial media headlines.
First, they told us a surefire recession was ahead. Next, they had us believe unemployment would skyrocket. Even worse, they sold us on tales of a coming economic collapse.
Fortunately, none of those prophecies rang true. Instead, stocks posted double-digit gains across the board, with the S&P 500 surging nearly 25%!
When it comes to the mainstream media, be careful what you consume… and always be suspicious of grandiose predictions.
Instead, focus on data, history, and evidence-based analysis like what we share in TradeSmith Daily. That — not fearmongering — is what will help you navigate any environment.
Great examples include our non-consensus call to buy beaten-down small caps on Oct. 19, 2023. Depressed valuations pointed to a monster bullish setup, which teed up a 19% gain in small caps since that post.
Another instance was the voice of reason to always remember to buy in November. History proved that November ignites a ferocious rally, with data going back to the ’80s. Since that post on Nov. 2, the S&P 500 delivered, ripping more than 10%.
With historical proof offering a guiding light, let’s construct a framework to forecast what potentially lies ahead for markets in the coming months:
We’ll start by studying how the market tends to perform in the first quarter. Then, we’ll take it a step further, looking at election years over that same period.
There’s a strong historical pattern to note…
Stocks Often Perform Well in the First Quarter
You’ve likely heard that markets average 10% a year going back decades. This is absolutely true.
For the last 45 years, the S&P 500 delivered a 10.35% average gain each year.
And part of that strong performance is the fact that Q1 gains 2.15% on average:
Green shoots in Q1 likely doesn’t come as a surprise. Lots of new money is put to work early in the year with 401(k) and IRA contributions.
Not to mention, fund managers begin placing bets on their best ideas as well.
So, should we just blindly pour money into the stock market given this backdrop? Not really…
That’s because 2024 is unique in that it’s an election year…
The 2024 Election-Year Investing Playbook
If you think election years are smooth sailing… think again. History shows a lot of mudslinging on the equity front in the first quarter.
Since 1980, there’ve been 11 presidential elections.
Here are a few facts about the S&P 500 during election years back to 1980:
- The first quarter falls an average of 1.49%, drastically underperforming the average 2.15% Q1 gain for all years.
- The second quarter kicks off a stronger environment with 3.09% gains, followed by 2.29% rips in Q3, and 1.19% jumps in Q4.
- The average full-year gain for stocks is 5.81%, drastically underperforming the average 10.35% market average.
A dip of 1.49% in Q1 may seem scary but notice that these election years include some of the nastiest pullbacks in recent memory — including the Great Financial Crisis of 2008 and the COVID pandemic of 2020. Those one-off scenarios drastically skew the historical results. And they aren’t likely to take shape this year.
But even if we’re in for first-quarter doldrums, the above graphic shows a very important theme: You’ll want to buy the dip in Q1 and ride the rip beginning in April.
If you’re sitting on cash patiently waiting for the next great setup, chances are you’ll get one in the weeks ahead. That’s welcome news!
But you’ve got to prepare now. Use TradeSmith’s arsenal of analytics to see which areas of the market rank best.
If you’re like me and care about all-star stocks, get started with the TradeSmith Investment Report, which recently outlined an amazing company poised to benefit for years from the A.I. tailwind.
Election years aren’t ones to fear… They’re ones to cheer.
Regards,
Lucas Downey,
Contributing Editor, TradeSmith Daily
P.S. Thanks, Lucas, for these great insights. If you enjoyed reading this dispatch, you can learn more about TradeSmith here.