Before jumping into today’s update, please take a moment and register for our member’s only webinar, 2022 Q3 Outlook: Profits, Politics, Prices, Powell, and Putin on Wednesday September 21, 2022, at 1:00 PM EDT here:
Heading into the end of Q3 2022 several issues remain paramount on investors’ minds as we all adjust our portfolios along with fund managers for yearend and 2023. Join us for this Almanac Investor Member’s Only discussion with plenty of time for Q & A. After we share our outlook, we will open the room up to questions from you our most loyal members and conduct our usual open dialogue on whatever you want to know more about. We will address the prospects for earnings, recession, midterm elections, the Sweet Spot of the 4-Year Cycle, the Best Six Months, sectors, our upcoming seasonal stock basket, inflation, interest rates and the war in Ukraine.
If you are unable to attend the live event, please still register. Within a day of completion we will send out an email with links to access the recording and the slides to everyone that registers.
After registering, you will receive a confirmation email containing information about joining the webinar and a reminder message.
Mid-September Update
As the market struggles during this prototypical seasonal and 4-year cycle weak period fueled by news, data and fear, it is the perfect time to prepare for the Best Six Months and the next bull market we expect to commence in Q4 at the outset of the Sweet Spot of the 4-year cycle. We are reminded of Warren Buffet’s salient words: “Be greedy when others are fearful” – but not so fast.
We included a chart of several midterm year seasonal patterns compared to 2022. In the updated chart here, we stripped out all but one: midterm years under newly elected Democratic Presidents. While 2022 has declined more than the average midterm year under new Democratic Presidents, it has tracked the trend quite closely with an initial June low followed by a summer rally, a mid-August interim high before a late-Q3 selloff. Should this pattern continue, it would culminate in a classic late-October midterm bottom.
This Is Not 2008
There has been quite a bit of chatter lately about 2022’s analog to 2008. As you can see in the chart below 2022 is tracking the course of 2008 rather closely. But it is hard for us to fathom a complete meltdown here in 2022 like we had in 2008 for several reasons. Sure, crypto got whacked and some big tech high-fliers plunged, and we reached official bear market levels, but there have been no major bankruptcies or systemic failures.
By September 2008 Bear Sterns and Lehman Brothers had already gone belly up, the Feds took over Fannie Mae and Freddie Mac, Bank America acquired Merrill Lynch, the Fed took over AIG, the list goes on. The market plummeted as credit markets seized up until the Fed, Treasury and Congress coordinated an infusion of hundreds of billions of dollars to shore up the credit markets in the Emergency Economic Stabilization Act of 2008, which created TARP (Troubled Asset Relief Program) and others.
We have had no major bankruptcies in 2022 and despite a late start with their transition to a tightening policy to quell inflation due to the pandemic, the Fed is finally on top of things. From recent policy actions and commentary it appears they have learned some lessons from Volker, the 2007-2009 Financial Crisis and their 2018 missteps.
But make no mistake about it, the first whiff of real trouble and the Fed probably taps the brakes on rates and QT (quantitative tightening). Case in point the brief window they opened to allow folks to settle Russian bond exposure despite the sanctions. It may have only been $1 billion worth, but there was likely 10x that in liabilities and derivatives. And in reality, the decline has been rather orderly so far.
Put the hyperbole aside. The Fed is not driving a stake through economy — it’s driving a stake through inflation. Yes, volatility is likely to pick up. There will be more big down days before we reach the bottom. It is the most bearish time of the year and the 4-year cycle, and the news flow, incoming data and continuing rate hikes are definitely adding fuel to the fire. We will likely have some sort of recession, considering GDP has already fallen for two straight quarters. Prices are up. Wages prices up. Mortgages rates up, but the job market is still firm.
Midterm Year Bottom Picker’s Paradise
As 2022 unfolds in typical seasonal manner as well as in line with the Weak Spot of the 4-year cycle (Q2-Q3 midterm year), the market is on pace to put in a classic midterm October bottom that ends the bear and begins a new bull market at the outset of the Sweet Spot of the 4-year cycle. Our portfolios have been in mostly cash for months as we honored our stops throughout the early days of the bear market and stuck to our strategies and systems.
With the Fed funds rate set to overcome the previous peak in 2018 when markets were briefly stunned, we must expect or at least be prepared for lower lows. But that should set up a near perfect Best Six Months Seasonal MACD Buy Signal and bull market rally that runs into 2023. But please be patient and wait for the seasonality to come around on the calendar and for our buy signal and other indicators to turn positive.
Sticking to Our Seasonal Trading Playbook
Over the long-term, since 1950, our Best Months Switching Strategy with MACD timing has outperformed the major indexes (pages 56 and 62 of 2022 Almanac). Throughout those 72 years for DJIA and S&P 500 and 51 years for NASDAQ there were periods where the strategy outperformed and periods where it underperformed. The roaring bull market of the nineties was one period were our Switching Strategy lagged as the market generally roared higher all year long. But when that period came to an end, the Switching Strategy reclaimed lost ground as DJIA suffered “Worst Months” declines in seven out of eight years from 1998 to 2005.
Shortly thereafter the credit and housing market bubbles burst triggering the financial crisis of 2008-09 along with the worst bear market and recession since the Great Depression. In response, the Federal government and Fed took then unprecedented actions to support the economy and the market. TARP and massive fiscal stimulus were provided by the government while the Fed cut interest rates to nearly zero and the market and economy began to recover. Quantitative easing by the Fed provided further support and liquidity to the financial system. As a result the market and the economy began to recover, and the market enjoyed well above average gains during the “Worst Months” of 2009.
![[BSM Table]](/UploadedImage/AIN_1022_20220915_Best-Worst_Table_since-2009.jpg)
Since the March 2009 market bottom, the market has enjoyed five periods of outsized gains during the “Worst Months.” The first was 2009; then again in 2010, 2013, 2017 and 2020. ZIRP (zero interest policy) and the recovery from the 2007-2009 Financial Crisis enhanced the Worst Months of 2010, a third round of QE boosted 2013, corporate tax cut anticipation lifted 2017 and the 2020 recovery from the Covid-19 shutdown and massive fiscal spending pumped up 2020. It is primarily these five years and the corresponding one-off events that have resulted in the market outperforming our Seasonal Switching Strategy over the last thirteen years. We are of the opinion that this is an exception, not some kind of new normal where black swan events and major disruptions occur every few years.
Some gains have been left on the table by the Seasonal Switching Strategy; however, this is only part of the bigger picture. The potential benefits of reduced risk have not been fully taken into consideration. Up until this year, NASDAQ has not suffered a single decline during its “Best Months” since 2007 (page 62 2022 STA) and its average gain during its Best Eight Months remains a solid 9.3% after this year’s double-digit loss. 2020’s “Best Months” declines by DJIA and S&P 500 were their first since 2008. While this year’s Seasonal Sell signal for DJIA and S&P 500 in April was essentially a wash, it did sidestep a portion of this year’s declines.
Looking back at the history of the Seasonal Switching Strategy in the 2022 Almanac, we see numerous years of success during the elevated inflation periods in the 1970s through the early 1980s. The record is not perfect, but the majority of market declines then were during the “Worst Months” and the majority of gains were in the “Best Months.” As we head toward the Sweet Spot of the four-year cycle, our Seasonal Switching Strategy does appear well positioned to deliver once again.
Seasonal MACD Buy Signal Update & Methodology
We are not issuing a signal now. On October 3, the first trading day of the month this year, the window for issuing our Seasonal MACD Buy signal will open. Using our pre-defined MACD parameters for our Seasonal Buy Signal of 8-17-9 we can see in the above charts that MACD has been trending lower since mid-August other than a quick blip positive last week. Generally, the deeper below the zero-line MACD is the more reliable the subsequent crossover signal tends to be.
As a reminder, the criteria to issue our Seasonal MACD Buy Signal is a new MACD crossover on or after October 3 from DJIA, S&P 500 and NASDAQ and all three indexes must agree. When all criteria have been met, we will send an email Alert.
In addition to our Seasonal Switching Strategy, we will also look to send our Seasonal Sector ETF basket in early October targeting the sectors with the highest frequency and gain magnitude during the upcoming “Best Months” period. We also anticipate putting cash in the stock portfolio back to work with a basket of undervalued and off-the-radar stocks that we believe could deliver above average price appreciation.