The Road Ahead: December’s Market Forecast and Investment Strategies to Consider

It’s the day after Thanksgiving and I hope you’ve recovered from a great holiday with family and friends. The “Old Normal” keeps playing out in 2023, almost to the week and day.  That was the title of our 2023 market outlook penned back in December of 2022 and that is what we continue to see year to date in the stock markets regardless of the doomsday calls throughout 2023. Given the timing of this taping, the data is 3 or 4 days old but here is a chart of the S&P 500 post November option expiration on Friday Nov 17^th.

If it looks familiar it is.  It is near the exact same pattern and outcome one would expect under the “old normal” we have discussed all year.  Here’s the overlay of the S&P500 with same period since our October 2022 lows overlaid with the October 1998 lows through the internet bubble peak in 2000.

Investors we’ve compared these periods all year as it was also an aggressive Fed rate increase, followed by a pause and then additional rate increases in 2000.  If you didn’t live through it, here’s two articles from March 2000.  You’ll see very similar wording to our Feds current language.  The first article is about their willingness to reaccelerate interest rate hikes in the first quarter of 2000.

 

Here that link is: https://www.wired.com/2000/03/fed-well-keep-hiking-rates/ and the second article is one refuting the Fed’s need to combat rising wages back then https://www.epi.org/publication/issuebriefs_ib136/

 

Both articles sound eerily similar to current ongoing Fed speak.  In fact, they sound so close you might think we are living in a parallel universe.

This week’s title is one of “Giving thanks in 2023”. Despite all of the global economic and social angst in the world in 2023, the team at OHFG forecast a return to the “old normal” for financial markets almost exactly a year ago in 4^th quarter of 2022 for our 2023 outlook.  For 11 months, that’s what we’ve gotten.  I’m giving thanks for helping educate our OHFG clients and prospects, calming their nerves, and keeping them largely in their seats for 2023 despite ongoing political, economic, and social turmoil here and abroad throughout 2023.

What’s the rest of 2023 look like under the old normal?  It looks like possibly one sharp (call it 5 to 8 trading days) drop in point terms for the S&P 500, yet small on a percentage terms, into one final MOC, that’s short for market on close, low in the markets buying opportunity. That would be followed by a sharp reversal up toward 4600 in December and close to ATH’s of 4800 near year end.  In fact, by the time this video hits Youtube, a quick pull back may have already begun. Why Do I think this is likely over the next 2 weeks?

First, the dollar index, which we’ve discussed many times as a key driver of trading positions and earnings over coming quarters has gone from overbought, to oversold in just 2 weeks.  Here’s the chart of the DXY Index which represents the trade weighted dollar index.

We discussed the DXY topping during the end of October in our prior videos. We discussed it being a primary driver for a November and December stock rally while many others were out in mass talking death crosses in the stock indexes and 1987 crash comparisons, neither of which mattered or happened.  The dollar is now oversold on support.  I would expect the DXY to rally for a few weeks putting pressure on late comers to the rally trading positions.

In prior videos in mid and late October, our investment team discussed how just as the financial news networks had discovered the importance of “real interest” rates, after ignoring them for 12 to 15 months, those real rates were peaking; they had broken their uptrends, and their decline would provide ammunition for growth stocks to rally in November and December.  Here’s the chart of 5-year real rates.

 

They too now have rallied back to support, and I expect them to sell off for a few weeks nearing the end of November, providing a headwind and excuse for stocks to pull back for a few weeks.

Frequent consumers of OHFG investment content know that our team looks at different volatility metrics than many other traditional equity investment managers who talk about it on financial networks.  Our team has significant industry experience running many complex equity products including long short mutual funds and equity hedge funds.  I look at volatility futures and options.  Here is a chart of a volatility futures contract that is traded. It is not the spot VIX which is NOT traded but widely discussed as a predictor of stocks by many financial market’s commentators.

 

Since the Oct 27^th low, forward volatility has dropped by 5 points and is now also on a level of support, like the dollar and like real interest rates.  Short term, it too is oversold and on support, and we would expect some institutional managers to come into the markets and hedge their portfolios against future market declines through year end in the coming weeks.  If you were up big year to date in performance, and your compensation was dependent on performance, would you risk hanging around for 4 weeks?  Most hedge funds who were having great years wouldn’t.

Additionally, at the time of this writing, there were 10 trading days before any losing trades left during 2023, if then repurchased in December would qualify for wash sales. This timing window and tax treatment prevents a manager from selling an investment at a loss in December and then repurchasing a position before the year end. If they do they get penalized, and their realized losses are repriced upward. This creates a short-term tax incentive to sell before the end of November.  It’s a quirk in the markets but very real to portfolio managers and to shorter-term traders.

.For now, the 2023 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 should not be either, and for that I am truly thankful.

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.

Do you need a retirement plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at 877-896-0040 @or fill out this form for a free consultation: https://click2retire.com/Connect