Top 2 Reasons why the Stock Market will Start Rising Soon

Let’s get something straight right away.  My title is deceiving.  I don’t know what the stock market is going to do next.  Neither does anyone else, although there are plenty of people who will try to persuade you otherwise.  Predicting the Super Bowl winner is a lot easier—and most people lost that bet last Sunday. 

I could give you twenty reasons why the stock market is going to turn up soon (but I’ll spare you and only give you two).  I could also give you twenty reasons why the stock market is going to keep falling.  I’ll give you a couple of those next post.

My reason for doing this actually isn’t to sound like all those people running for president this year speaking out of both sides of their mouths.  My reasons are actually two-fold:

1. You can make the stats say anything you want them to say.
2. It really isn’t possible to know what’s going to happen next.

But here are my top 2 reasons to be bullish on stocks:              

1. Most of the time when the stock market pulls back, it ends with under a 20% loss.  According to a piece by Guggenheim Investments, there have been 111 times the S&P 500 has declined by 5% or more since December 31, 1945.   Of those 111 times, 75 of them have been declines of 5-10%, and 25 have been declines of 10-20%.  Just 11 have been declines in excess of 20%.  I did double check this number and actually came up with 13 declines.  But it doesn’t change the point that the vast majority of declines are under 20%. With this decline (so far) in the -15% range, you might be happy to hear that it take 4 months on average for the market to bottom, but it rebounds to previous highs 3 months later. 

2. Stocks typically get volatile around the time the Federal Reserve raises rates, but get over it quickly.   

Check out these charts for the S&P 500 showing the last three times the Federal Reserve raised rates:

The last time the Fed began raising rates was July 2004, indicated by the vertical blue line.  You can see that the market actually began declining in February of that year in anticipation, and continued falling through August.  The total pullback was -9%.  After which, it moved up rather well.

The Fed began raising rates in July 1999 as well.  This time, the market pulled back -13% through October 1999.  Then, it rallied through the following March.  At which time, you probably remember the tech bubble burst.  Still, one year out, the market was still up. 

The final chart shows the Fed raising rates beginning in February 1994.  Here again, the market suffered an immediate pullback (-10%), but regained it’s footing in April, and was up a year later.

The takeaway is that in the last 3 instances when the Fed started raising rates, the stock market pulled back initially, but was up a year later.

So, there you have it, my top 2 reasons why the stock market will start going up again soon.  Next time, I’ll give you my top 2 reasons why the stock market will keep falling.