As we wrote in our late July post entitled Amber Light (link),
“The purpose of this note is not to alarm anyone. There is a lot of data that suggests in 12-24 months we could be 20%-25% higher than where we are right now. We just feel that the market is stretched and is due for a much needed pullback. The pullback could be sharp and swift and just don’t want anyone to be unprepared.” – July 28th, 2020
In our opinion, we are getting the much needed and healthy pullback we were looking for, and are much happier to put new capital to work at these price levels, with the ever-present knowledge to be on guard for something more substantial.
Here are a couple of additional reasons why we feel the next 12 months might surprise us to the upside (3600 on the S&P 500 is not out of the question this year, regardless of what happens in November).
- Strength Begets Strength
The S&P 500 has had an historic run from the March lows and prior to last week had spent over 100 days above its 50-day moving average (a rolling average of the previous 50 trading days). According to Ryan Detrick of LPL Research, since 1950 there have been 15 previous instances of this occurrence. On average, the S&P 500 is up 8% over the next 12 months, while being positive 73% of the time.
2. It’s Just That Time of the Year
Election seasonality has followed its traditional peaks and valleys very closely for the past few months, and kicked in almost perfectly at the beginning of September. If the seasonal calendar remains accurate, the seasonal low (the best time to buy) come in the first week of October.
3. Same Story Different Day?
During the advance from March 2020, the S&P 500 has experienced 4 separate pullback between 6-10%. This latest pullback as of today’s intraday low is -10.55%. In hindsight, each of those previous pullbacks was a good buying opportunity. Will it be different this time? Perhaps, but being aware of history and following its guide has stood the test of time rather than assuming things will be “different time time”.
If you’re a long-time reader of our posts, you know that we encourage reading and education as much as possible, so I’d like to take a moment to urge those of your looking to increase your knowledge of investing to check out the most recent book by Morgan Housel, The Psychology of Money. For my money, Morgan is the best writer (of any age) in the financial space, and I’ll leave you today with a quote from Morgan to always keep in the back of your mind…
“All good investing comes down to surviving an inevitable chain of short-term setbacks and disappointments in order to enjoy long-term progress and compounding.”
A special hat tip to Walter Deemer for the title of this month’s post as well. Please stay safe and be well.
Adam