1) As pointed out in previous updates the stock market has a very good record 12 months after a 20 percent or more decline. 7 out of 10 times the market is up one year later.
2) The valuations of stocks are back to a "normal" range of 15-16 times earnings. That is down from 21 times.
3) Historically the market has performed well after the mid-term elections. Since 1962 the market has gained over 15 percent in the six months after the election. The average for non-midterm years is 4 percent.
Like we said earlier what happens to equity prices over the next 12 months will depend on inflation and how aggressive the Fed must be to stop it. For investors with a longer-term horizon, it is likely a good time to add to your stock positions.
Where are we now
After several disappointing numbers on inflation the question remains: When will we see a decline in inflation? The Federal Reserve had made it clear that it will not stop the interest rate rise until we see a reversal in the current inflation numbers.
We expect that the Fed will stay aggressive through year end. The Fed Funds rate could be 4.5 percent by December. How much damage that does to the economy and the markets is yet unknown. If the Fed does not move aggressive enough, we risk higher inflation in 2023. If they are too aggressive (raise rates too high) we risk a deep recession.
Our bet is that the Fed pauses after December. A mild recession is likely in 2023. The stock market is probably discounting this scenario and further downside would be limited. However, if the inflation numbers stay high through year-end, we could see higher rates and a lower market next year.
*Kiplinger Finance Advisor Letter October 2022