At this week’s investment policy committee meeting, we discussed how the duration and fragility of this economic recovery hints at a down 2013 for stocks.
We think the U.S. economy has four things going against it: 1) U.S. real GDP growth is typically weakest in year one of the presidential cycle, 2) come January, this recovery will be older than the average duration of all recoveries since 1900, 3) the S&P 500 recorded a median 9% decline whenever the first year of the four-year presidential cycle coincided with a recovery that was older than 20 months, and 4) the dire rhetoric surrounding the Fiscal Cliff negotiations is depressing investors’ confidence and is causing business leaders to delay hiring and expansion, thus threatening a harmful downdraft to this already low-flying recovery. But while history gives us reason to be cautious, we don’t believe the likeliest outcome of the Fiscal Cliff negotiations will be perpetual stalemate. Both Democrats and Republicans agree that they need to raise revenues and reduce debt. They just have yet to strike a compromise that will help them save face. We think they will find this solution before forcing our economy to endure a crash landing. Should the impasse in Congress cause the S&P 500 to decline this month, however, then the 2013 stock outlook would be increasingly tenuous. Since 1900, whenever the S&P 500 was up for the full year, yet ended on a down note by declining in December, the “500” posted an average return of minus 6.2% in the following year and fell more times than it rose. So let’s just hope that, in the end, Congress will be chanting “Ho, Ho, Ho,” rather than “No, No, No.”