Santa has a Calendar and Bloomberg

Much to the chagrin of perma stock market bears, the “Old Normal” keeps playing out in 2023, almost to the week and day.  It looks like the bottom and upturn for a 4th quarter rally came right on cue. The markets looked to have made a low on Friday October 27th, at the end of institutional tax positioning, at the end of the final full week in October. The OHFG investment team had discussed this likely dynamic for months, all the way back in June and July, and its likely outcome for the market turning back higher in very late October and early November.

Folks, most everyone on financial TV says, “we don’t have a crystal ball”, and then goes on giving their opinion predicting what the future might hold for the markets, sectors, or individual stocks.  Investors, by definition, that is the meaning behind having crystal ball.  However, nowhere in the definition does it say that the predictions seen when looking into a crystal ball will be accurate, particularly when it comes to the financial markets. We do our best with limited information, making decisions, based on our experience and knowledge, serving our clients in the best manner we can.  The future is always hazy and uncertain.

Two weeks ago, the title for the Stock Talk was “Its make-or-break time,” and last week it was, “Is it really different this time”?  Here are the two links to those videos if you missed them. (insert links to both prior videos). This week, I am repurposing and updating some of the content and real-time data we watch, and we have shared with you, in advance, over the last 4 months during the summer correction in the stock markets.  For fun, I am titling this one, “Santa has a Calander and a Bloomberg”.

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The S&P500 traded down and to the right in a very normal seasonal fashion since the mid-July 4600 peak. Here is a chart of the S&P500 since last October 2022 low.

Chart 1: S&P 500 Index since last October 2022 low

You will see the overall market went nowhere since mid-June of this year and closed slightly below the 200-day MVA a week ago. And of course, the dire 1987 Crash coming calls came out of the woodwork, even though YTD, the S&P500 looks nothing like it did in 1987. While many of those calls were put out in force by a host of financial TV personalities, the OHFG team was messaging it was finally a favorable environment for the market to turn higher.

Why? For many of the same reasons we discussed over 4 months ago in advance of this correction, and throughout the summer pullback. First, with the end of October comes what has historically been the sweet spot of the seasonal calendar for a 4th quarter rally during the 3rd year of a Presidential cycle. I have had those dates circled on my calendar since October 2022. Yes, for over a year. Investors, historically the Santa Claus rally” that many in the financial press talk of does NOT start in mid-December. I repeat historically is does not start in mid-December.  It starts at the end of October. Investors, Santa Claus, unlike many shoppers, who now can use Amazon for next day delivery, Santa Claus shops early.

We have covered the monthly seasonal returns for the S&P 500 many times over the years, but once again here are the daily, yes daily, average returns since 1945 from Merrill Lynch.

The daily, yes daily, average returns since 1945 from Merrill Lynch.

If you break out your reading glasses and look closely at this table, you will find it quite amazing. October 26th  and October 27th, yes the same days as two weeks ago, are historically the end of the summer sell-off, not the beginning of a market crash cart.  Of course, history does not always repeat itself, and past performance is no guarantee of future results, but so far so good for 2023 and the beginning of the 4th quarter Santa Claus rally. Hence the first part of this week’s title, Santa has a Callender.

Not looking at historical data, but rather looking at two real time data series that we’ve discuss earlier and more often than most advisors, which have proven early to tops and bottoms in the markets the last few years, we find reasons to support an ongoing 4th quarter stock market rally.

The first is a chart of “real interest rates” that about 2 weeks ago, right near their peak, many other financial commentators on TV, after ignoring for almost 18 months have finally discovered as significant. For trading and short-term indicator purposes, I have been watching the one year and two-year real interest rates and those both broke their uptrends the week of October 13th. For this video, I am focusing on the longer-term maturity 10-year real interest rate which many other advisors have been quoting as key.  You will see on the BBerg chart below the steep uptrend since July has been broken.  That is great.

Chart 3: Bloomberg Longer-term maturity 10 year real interest rates

You will also see, from the chart below from technician Rob Sluymer at RBC Wealth, that momentum indicators like the RSI have peaked and rolled over for real interest rates, like when?  Yes, like the October 2022 lows in the markets. That is an incredibly good thing.

Chart 4: US 10-year Real Rates from Rob Sluymer at RBC Wealth

I have discussed the importance of real interest rates to stock PE’s and the markets for over a year. Investors, this cycle, a peak and trend change in “real interest rates” has been an early indicator for good things to come. Similar prior peaks included Xmas 2018, the Covid 2020 lows, and most recently the October 2022 stock market lows. Investors, this is the first strong indication Santa has a Bloomberg too and seems to be a chartist at heart.

The second and final real time data series I want to discuss is the dollar. For this cycle, dollar weakness has been good, and dollar strength has been bad for stocks. Why? Because the dollar strength hurts US large cap stocks earnings as they have heavy revenue overseas. Dollar strength marginally hurts the S&P500’s revenue and earnings growth rates while dollar weakness helps both. Here is a chart of the broad dollar index most investors look at, the DXY Index.

Chart 5: DXY Index

If you overlay a chart of the S&P500 on this chart of the DXY index, you would see that rallies and selloffs in the S&P500 would coincide in an inverse way with rallies and selloffs in the DXY index. While the stocks market was selling off at the end of the week of October 20th, few TV commentators were looking at these 2 data series in real time. Both real-time data series implied that the stock markets would be bottoming shortly in their very normal seasonal way.  And given the market’s reaction and strong rally up the week of October 30th, once again I have to say that Santa has a Bberg and is a better chartist than many others in the world of finance.

As for a template of what a continuation of the “old Normal” might look like for the remainder of the 4th quarter of 2023 and first quarter of 2024, I update a chart I have referenced for about a year, comparing the final 2 years of the Internet buildout in 1998-2000 to the current AI cycle buildout land grab that started in October of 2022.

Chart 6: Comparing the final 2 years of the Internet buildout in 1998-2000 to the current AI cycle buildout land grab that started in October of 2022.

To date, the markets’ moves in many asset classes have been eerily similar, almost to the day and week. I challenge you to explore this topic and analogy of time periods more in your own research.

For now, it remains the OHFG investment teams’ opinion, that no, the summer selloff that we forecast from July was not “different this time” and a seasonal Santa Claus rally, starting late October and lasting into late December and potentially extending in a volatile manner into Mid-March 2024 will not be either.

Oak Harvest Financial Group manages broadly diversified equity portfolios that balance risk and reward for our clients. The investment tools our advisors and financial planners use are usually a combination of markets based and insurance-based tools to meet your retirement goals.

Our in-house investment team is busy working on new tools for our advisors and retirement planning teams to use in the future. Stay tuned. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at 877-896-0040 or click here to schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.