The NFL playoffs are upon us. The journey to win the Super Bowl and the accompanying Lombardi Trophy is one of the most arduous in sports. It is so difficult that there have been no back-to-back winners since the New England Patriots in 2004 and 2005. Last year’s champions, the Los Angeles Rams, did not even make the playoffs this year, so we are closing in on 20 years without a repeat title.
Just as historic, maybe even more, would be back-to-back years of declines for the S&P 500 Index. 2022 was truly historic for both stocks and bonds, featuring the very rare occurrence of both declining by more than 10% in the same year. It has only happened twice in the last 100 years (1931 and 1969).1 In each subsequent year, the stock market declined again while the bond market rebounded.
But a data set of two does not give us the strongest level of conviction. So how about just looking at the stock market following a down year? Well, going back to 1928, the S&P 500 Index has only experienced four incidents of declines in back-to-back years. So, given these rare instances of consecutive declines, it should be pretty safe to assume that 2023 could be a better year for equities.
But — and there is always a but — except for the period during World War II, those back-to-back declines all occurred when the Federal Reserve was raising interest rates into a recession. So, this historical observation does have the potential to repeat itself in 2023.
Anyone who knows me well, knows that I tend to avoid making market predictions. Everyone makes them at the beginning of every market year and they are of no consequence, whether the person is right or wrong. I personally do not like to make them because 1) we don’t need to make predictions to generate a solid track record and 2) as Charlie Munger once said — “if you make a public disclosure of your conclusion, you're pounding it into your own head. Many...that are screaming at us, you know, they aren't convincing us, but they're forming mental change for themselves, because what they're shouting out they're pounding in.”2
I believe that when an investor makes a prediction, it has the potential to alter the way that future information is digested and analyzed. You develop a bias that will seek confirming information instead of evaluating any new information with an open mind. But that said, I do put some value on historical precedent, as human nature (and market behavior) does tend to repeat itself.
So while history is not an exact guide for the future, it certainly might be able to help us gauge the odds of potential outcomes. This is how we approach historical and other market observations for the Penn Mutual AM 1847 Income Fund (PMEFX).
Gathering all of these observations, it is clear that the odds should be in our favor and that the stock market should bounce back in 2023. But we also need to leave a little room in this projection and acknowledge that the current market conditions are similar to those years of back-to-back declines. So that is probably about as close as I am willing to come to making any predictions about 2023.
OK, I lied. I did predict that the Philadelphia Eagles will win their second Super Bowl and Lombardi Trophy on Feb. 12, 2023, in Arizona! And yes, I did predict the first one in 2018 (but I am admittedly, unabashedly biased and predict them to win almost every year…haha).
1Source: Callan- Unprecedented Territory—and the Inherent Limits of Diversification; 5/13/22
2Source: The Singju Post- The Psychology of Human Misjudgement: Charlie Munger; 12/24/20
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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