What can investors learn from the past?
1. Strong starts tend to signal more strength ahead
January ended with a nearly 2% return for U.S. stocks. While one month will never define a year, history suggests that starting strong is much better than not. Going back to 1950, years with a positive January usually see rallies of almost 17% and end with a gain nearly 90% of the time. When January is negative, the results are much worse, as the S&P 500 has seen an average full-year decline of about 2% and has been positive 50% of the time.
2. When the Fed cuts, assets tend to outperform cash
To get a sense of what we should expect during a rate-cutting cycle, we looked at every one since the 1970s. The first pattern that became clear was that core fixed income outperformed cash in almost every instance. This makes sense, because core bonds offer investors the opportunity to lock in yields instead of being at the mercy of cash. For stocks, you need to go one level deeper. If the Fed is cutting rates to support the economy, stocks are probably not doing very well. But if the Fed is cutting rates outside of recession, stock returns have averaged just over 30% across the instances we identified.
3. Regional bank stress is a risk, but probably not for the broader economy
In our outlook, we wrote about how stress in regional banks and commercial real estate was likely to percolate throughout the year, despite the Fed’s pivot to easing. We believe such stress poses a risk to our outlook, but our experience from last year suggests this particular economic cycle is not very sensitive to regional bank lending, and the Fed has set the precedent that it would do what it takes to avoid worst-case outcomes.
4. Markets tend to care more about fundamentals than elections
If we end up with a Biden versus Trump election contest, it will be the first time since 1892 that both candidates of the two major parties have already served as president (back then, it was Cleveland versus Harrison). For markets, this means we already have an initial idea of potential policy proposals; however, the race is still nine months out. For what it’s worth, stocks had strong, above-average runs in both the years that Biden and Trump were elected.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
firstname.lastname@example.org | (310) 860-3658
Source: J.P. Morgan Private Bank, February 2nd, 2024. “Groundhog Day: What can investors learn from the past?” By Madison Faller, Global Investment Strategist, and Jacob Manoukian, U.S. Head of Investment Strategy, J.P. Morgan Private Bank.