ProfitScore Update – January 2024
To the clients and friends of ProfitScore:
See Saw as a Predictor?
Last year, we witnessed a significant rebound in the market after a notably challenging period, which had experienced one of its worst years, particularly for a 60/40. This pattern often leads to the assumption that a strong recovery typically follows a downturn and vice versa, as evidenced by the market’s performance in 2023, succeeding the difficulties of 2022. However, the question arises whether this pattern is a reliable predictor of future trends, especially considering the potential performance of 2024 after the recent robust returns in 2023. In 2022, the market endured 248 sessions with negative year-to-date (YTD) performance, marking it as one of the most challenging years historically. Contrastingly, 2023 saw only two sessions closing with negative YTD performance, indicating a significant turnaround.
Historical data reveals a mild positive correlation between the frequency of negative year-to-date (YTD) closes in one year and the subsequent year’s percentage return in the S&P 500, tracing back to 1929. It’s been observed that many of the S&P 500’s most successful years have followed those years that experienced a high number of negative sessions. In the next two graphics, below is a chart and table produced by the brilliant analysts at Sentimenttrader.com displaying this effect.
The effect of see-saw is much more pronounced in recent years, with a much higher tendency for the market to revert. This recent phenomenon is something that causes your senses to perk.
Will future rate cuts and election year liquidity produce tailwinds that catapult the market higher in 2024? As of this writing, there have already been more negative YTD closings in 2024 than in all of 2023. Like most years, bullish and bearish scenarios are fighting against each other, ultimately determining market outcomes. Although there are no crystal balls, 2024 should be a more challenging year than 2023.
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