The market hates uncertainty, such as the scenario we experienced in February leading up to Russia’s invasion of Ukraine. Once Russia launched its invasion on February 24, all the major indices rallied 3% or more to close out the month of February. As the calendar rolled over to March, the market’s focus quickly shifted from the event in Ukraine to the upcoming and greatly anticipated Fed meeting. The uncertainty of what potential policy changes the Fed might make pulled down all the major indices by at least 4% through March 14. As if by magic, once the Fed meeting started on March 15, their policy changes were announced the next day. The uncertainty was gone (for now), and the market was free to run through the end of the month.
March is notorious for being a month where corrections and bear markets get reversed. Although there is still concern moving forward, given that this is a mid-term year, the reversal we have seen in the last few weeks has been compelling. This is what traditionally occurs when the market moves past an ‘unknown worry’ and all the fast money rushes back in and drives prices up quickly. Always remember that the markets are highly resilient; they have been able to handle every crisis thrown at them over the decades, and they always bounce back. As we forecasted in our last newsletter, March produced the first positive returns for 2022.
April Historical Data Points
April has become the strongest month for both the Dow and S&P 500 over the last two decades. While the first half of a midterm election year is typically weak, April is historically a positive month.
The month of April has been positive for the S&P in 14 of the last 15 years, and the only decline was -0.67% in 2012. In the previous three years, the S&P has averaged an exceptional 7.34% return for the month.
Historically the Thursday (4/14/22) before Good Friday is very bullish, while the following Monday has traditionally been one of the worst post-holiday trading days.
April represented the end of the “best six months for the market before the ‘sell in May’ crowd took over. As we will explain next month, it should be ‘sell in August,’ but sadly, there is no catchphrase that rhymes with August.
The First Quarter
As we have said many times, problems that affect the market always seem to show up during mid-term election years. 2022 has continued the trend so far. All significant indices remain lower on the year. Considering the number of external issues the market has had to face over the last three months, it's astonishing that the overall market is performing as well as it has. So far in 2022, the market has had to face the following:
The Federal Reserve accelerated and completed the taper of the most extensive accommodative policy ever undertaken.
The Federal Reserve raised interest rates for the first time since December of 2018 and continues to hint at many more rate increases ahead.
A major war has broken out between Russia and Ukraine, which has continued for much longer than most have expected.
The price of oil cleared $100 per barrel for the first time in 8 years, driving gas prices up to record numbers.
Inflation is running at a 40-year high with no relief in sight.
Considering all these issues, it is surprising that the S&P 500 is only down around 4.5%. Based on our research, the market seems to be already looking past the above issues anticipating that they will be resolved sooner than later. Our primary concern remains the Fed and its inability to move when needed. They have shown time and time again that they are often too late to move. Currently, they are talking about being much more aggressive than expected, but we believe they should consider being more tactical at this time or risk a much bigger policy mistake.
A Few More Notes from the First Quarter:
The first three months have been historic regarding weakness in the bond market. When the Fed released their December FOMC minutes on January 5th, this sparked a dramatic rally in the 10-year yield and caused the bond market to underperform in a way not seen since the Taper Tantrum of 2013. We briefly saw the yield curve invert for the first time in several years. While many believe this eventually leads to a recession, we use it more as an indicator that the Fed is incorrect in its current expectations and activities. Another reason we think the Fed will become much more dovish.
In the first quarter, the top S&P 500 performers were mostly commodity-related companies, with oil and fertilizer names leading the way. On the other hand, the weaker market areas for the quarter were technology and consumer discretionary names that benefited from the ‘stay at home’ trade.
The mid-term election is only 222 days away and typically ignites a profitable stock market rally.
April has become known as the best-performing month for the market over the last few decades, and we anticipate that this trend will continue. From a timing standpoint, we had been expecting a vital bottom to develop the first week of April. This may have come a few days sooner than expected, but it should not affect the overall strength in April. We have seen several breadth thrusts in our daily money flow indicator over the last two months that should lead to much more stable activity within the market and a bias to the upside.
There are two significant issues to keep an eye on for the month:
Russia and Ukraine - at this time, the market is acting as if the conflict in Ukraine is winding down and will not get worse. If this conflict suddenly shifts and increases in nature, the market could feel pressure from another spike in oil.
Earnings - we will start entering earning seasons for the first quarter, one that we feel will be lackluster. Most companies have another quarter of tough comps and adjusted expectations due to supply chain issues and shut down business operations in Russia. We feel it will be imperative to focus on companies that post positive earnings revisions.
The underlying technical indicators of the market have improved tremendously since our stated internal market low on January 24th. April should continue to show improvement. While we cannot say with total certainty, we are also expecting April to represent climatic highs for both bond yields and oil for a while. Relief in both areas would be a positive for the stock market moving forward.
So, expect a strong month overall for the market as we proceed to the mid-term elections. After April, the market's seasonality becomes much more difficult, but for now, those worries can wait a few weeks.