Threats of inflation and recession. Increased interest rates from the Fed. Divided US politics. It is an external regional war with global implications. I’m not talking about 2022 – I’m talking about 1966.
A regular set of scares plagued the products throughout the year which also gave us the Chevy Camaro, the NFL-AFL merger and “How the Grinch Stole Christmas.” But a year later, 1967 delivered not only the “Summer of Love,” but an impressive collection for sales as economic worries faded. This year is 1966. Expect a wild, 1967-like bull market next year.
Markets are always more surprising – gaps between expectations and reality happen. When political, cultural and economic fears are overwhelming, even the smallest positives gain a powerful edge. Anything less bad than fear inspires relief. Bear markets create a lot of uncertainty.
In 1966, the S&P 500 remained in a small bear market – a 22% crash that began in early January and bottomed out in October (yes – as in 2022). The Vietnam War escalated. Social and infrastructure laws are added to the midterm elections. The distaste for President ‘LBJ’ is different, but in many ways similar, to the feelings among many voters for President ‘Brandon’. The economy has exploded. So the Fed raised short-term interest rates – less than they are now – but at historically significant, firm and intimidating levels.
The fear of falling took over. Bears love to talk about “control” – fear, violence, selling often ends bear markets. They were happy to talk about it in 1966, too. But the boss never came. Instead, October marked the beginning of a new market, with sales increasing just as they have emerged this quarter. After a 6% decline in the fourth quarter, sales increased 24% in 1967.
The mood in 2022 was – and is – negative when it comes to stocks. Almost all surveys show pain, such as the American Association of Individual Investors’ stock market survey. The University of Michigan’s Consumer Price Survey is close to an all-time high – that’s only what happens when prices are high. The fall of 2023 is highly anticipated. 68% of respondents to the Bank of America Fund Manager Survey expect one.
The truth is more understandable. A minority expected us to be in a recession last quarter. But third-quarter US GDP grew at a very strong 3.2% annual rate, reversing two consecutive quarterly declines (disadvantages of changes of data and import). Almost every other major country saw positive, even better GDP growth.
However, consensus expectations of the decline continued to grow. Now, mind you, it’s not a bad thing at all. The longer companies expect a recession, the more they prepare. Companies have spent this year cutting data and stockpiling. As a result, the risk is reduced, and if it comes, it will be much milder than before. The warning is to reduce.
Likewise, the CEOs of almost all the major banks – from Jamie Dimon to Jane Fraser – have appeared, long and often, to destroy the American economy and predict a recession. But economic downturns often lead to a negative increase in the cost of credit on their loans, reducing income. If these banks were really afraid of default, these banks would probably have already written off their loans.
They didn’t. As I noted in this column December 13, November 198% of American loans reached 11.8% year-on-year, accelerating from 4.0% at the end of the year 2021, showing monthly growth it is completely inconsistent with economic growth. Ditto for global loan growth, which has grown every month since March.
Are you scratching your head? Watch what banks do, not what they say. What they say is emotion. What they do is true.
And hike the Fed? Everyone thinks those things kill the economy. Usually, they do. But every time they raise rates this year, loans grow faster. Why? Because the profits of future loans are now increasing with rising prices. And when they borrow, borrowers spend. They don’t sit up. Historically, bank lending rates have generally been the same as overnight bank lending rates controlled by the Fed. Not now, as I noted here on December 13.
For that reason, many of today’s most pressing “rate reversal” fears — 3-month Treasury yields exceeding the 10-year yield — are overblown. In September 1966, the Fed also changed interest rates. But most of the changes came later, after sales, like this time. And nothing went wrong.
Political? Like 1966, 2022 is a midterm election year. As I detailed in this column Nov. 16, midterms made rocket fuel market – average 18%-plus return in the three years of the presidency of the United States. They were stronger, averaging 28%, when the second year was bad, such as 2022 and 1966. Products rose 24% in 1967.
Unlike 1967, 2023 income should flow smoothly, reversing 2022 when 2023 inflation falls, as I noted in this column. Longer interest rates will make that risk lower.
Despite all of this, I hear you say: 2022 was not pretty. The default idea feels like a safe, comfortable bet. But it may also be setting people up for the worst in the long run.
As we ring in the New Year, I suggest we prepare for something surprising. I can’t promise another “Summer of Love” for 2023 when it comes to sex, drugs or rock ‘n’ roll. But I believe that the New Year will provide a strong competitive market around the world.
Ken Fisher is the Founder and Chairman of Fisher Investments, a four-time New York Times best-selling author, and a frequent correspondent in 17 countries around the world.
