U.S. Stocks in 2023: More to it Than Luck

As the saying goes: Buy when there’s blood in the streets—sell when the trumpets are in the air.

With the benefit of hindsight, it’s clear there was blood in the streets last year. Many expected an encore, but the complete opposite happened—the market’s been positive in six of the year’s first seven months.

Now the question becomes: Are the trumpets in the air?

The Federal Reserve did their first rate hike of this cycle on March 16, 2022. Ten more rate hikes followed over the next 16 months—one of the most aggressive Fed hiking cycles ever.

But since that first hike in March 2022? The S&P 500 is positive, up more than 3%.

This is hard to fathom. A positive stock market after everything that’s happened doesn’t feel like a square that would’ve been created if this was bingo.

In some sense, it feels lucky.

Wal-Mart founder Sam Walton had an interesting anecdote about his company and luck, mentioning:

“It was always interesting to me that, except for those folks who worked in our company, our stock got very little support early on from the folks at home in northwest Arkansas. I always had the feeling people around here who remembered us when we had one store and three stores, somehow thought we were doing it with mirrors. They couldn’t help but think we were just lucky, that we could not continue long term to do as well as we have done.”

It’s always easy to say luck is intricately involved in a positive outcome. In Wal-Mart’s case, it was easy to say their luck was going to run out as they expanded out from rural Arkansas closer to city centers where it seemed inevitable competition from Sears and K-mart would overwhelm them.

But the luck never did run out. And the logic many applied to Wal-Mart could easily be applied to today’s market.

Many conversations advisors are having with clients right now cycle around the idea: Has the rally gone too far and will the luck run out?

The easy answer? It’s a matter of perspective. The market is inherently unpredictable over the short-term.

For example:

•  Since 1970, there have been 19 different years where the S&P 500 has had an annual return of 20% or more.

• Eight of those 19 years (42% of the time) saw an intra-year decline of 10% or more.

• 17 of those 19 years (89% of the time) saw an intra-year decline of 5% or more.

Given the U.S. market is up around 20% already this year, there’s significant evidence that a market correction—of some variety—could be looming.

The best remedy for moving forward is to be clear with yourself about your investment time horizon. As they say, many investing arguments are just people with different time horizons talking over each other.

If your time horizon is only a few years, a portfolio shift could be necessary. Maybe decreasing equities and rotating to bonds or possibly diversifying within equities by allocating to cheaper parts of the equity market like non-U.S. stocks.  

But if you’re time horizon is long-term—say five years or longer—then the best path forward is probably to continue on the path you were already on.

And given new all-time highs for U.S. stocks are within reach, people may believe this is the worst time to invest. But history would refute that.

New all-time highs tend to happen in clusters that can last decades. It’s very rare the market makes one new high then retreats. Often, new all-time highs are followed by more all-time highs.

Nevertheless, when markets are sitting near all-time highs, many can’t help but feel uneasy about putting new money to work. Some make the decision to remain in cash and wait for a correction before they invest.

But sitting in cash waiting for the market to provide clarity costs quite a bit over time.

All this brings us back to initial question: Is this market just lucky?

The short-term is purely a guessing game—most would acknowledge that.  

But over the long-term? You should probably be optimistic.

Take a Warren Buffett CNBC interview from 2017 for example. Buffett predicted the Dow Jones Industrial Average (the Dow) would be over 1 million in the next 100 years.

The Dow sits at 35,300 today. Using hypothetical numbers, if the Dow returned 7% annually, it would reach 1 million in 2072, roughly 50 years from now.

Of course, that does not mean it will happen. You can easily argue reasons why it won’t. But it’s not an impossibility either. Especially when you consider the Dow has compounded at more than 10% annually since 1987, 7% could even be considered a conservative hypothetical.

Having the right perspective matters a lot over the long-term. And a lot of luck may come with it.