- Birinyi Associates
With the S&P 500 Index SPX up more than 20% on the year, could the rally have more steam left in it?
Stocks got a big boost from the Federal Reserve’s surprise decision not to scale back monthly asset purchases for now. Plus, there’s a whole range of possible rally killers out there. But history is on the stock bulls’ side, says a recent note from Birinyi Associates.
Looking back to 1928, Birinyi found that each time the S&P 500 gained more than 15% over the first three quarters, the index was likely to tack on extra gains in the fourth quarter. Big exceptions to that were 1929 and 1987 (see above table). But for the most part, the fourth quarter was positive nearly 80% of the time with an average gain of 4.45%.
As for uncertainties left in 2013, namely, whether the Fed will taper asset purchases, whether a new Fed chair will be announced, rising bond yields, the debt ceiling, possible military action in Syria, and a possible economic slowdown, Birinyi refers to what it calls the Cyrano Principle: “If the concerns are as obvious as the nose on your face, chances they are clear to the market also.” In other words, the market has already taken into account those uncertainties and will digest and adapt to the outcomes.
Addressing each of the uncertainties, Birinyi noted:
- Each time the Fed has raised rates since 1962, the S&P 500 has tended to rise, with a 9.01% average gain. “For the long-term investor a change in Fed policy is not a reason to panic, tightening policy does not necessarily coincide with a market peak or the beginning of a recession,” the firm said.
- After the appointment of five new Fed chairs over the past 50 years, only once has the S&P 500 been down a year afterwards (as happened with Alan Greenspan in 1987).
- Going back to 1962, Birinyi found that a prolonged rise in interest rates doesn’t necessarily signal an end to a rise in stocks, in fact, stocks were an average 7.5% higher over the next six months after rates started rising.
- A little stickier is the question of raising the debt ceiling, especially with the summer of 2011 fresh in mind. Since 2002, the S&P 500 has been positive 55% of the time six months after the debt ceiling was raised with a median gain of 1.3%, but big stock market losses in 2007 and 2008 drag that average down to a loss of 5.15%.
- While the possibility for military action in Syria may have lessened, it’s still a possibility, but Birinyi’s review of U.S. military conflicts since Vietnam found little negative reaction as far as the stock market was concerned. Similarly, as MarketWatch found in a review of stock market reactions to airstrikes where the U.S. has had a hand, stocks tend to do better once the ball gets rolling on military action.
- With economists looking at a GDP of 2.5% in the fourth-quarter and 2.7% in the first quarter of 2014, Birinyi looked at 16 other quarters since 1962 where GDP growth was 2.5% to 3.0% and found that the S&P 500 traded higher 88% of the time with an average gain of 5.6%.
–Wallace Witkowski
Follow The Tell on Twitter @thetellblog
Follow Witkowski @wmwitkowski
