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Down Q1 Midterm Years & Bear Market Bottoms

As we enter the last month of the Best Six Months, the
market logged its first down quarter in two years since the beginning of the
pandemic. Going back to 1930 when our S&P 500 data begins Q1 was positive
55 years and negative 37 times over the 92-year span. Overall, years that
advanced in Q1 were up 46 of the 55 years or 83.6% of the time with an average
gain of 13.2% for S&P 500. Years when Q1 was down, were positive only 16 of
the 37 years or 43.2% of the time for an average loss of -0.1%.

What jumped out at us were the midterm years that had losing
first quarters. In the table we compiled here, the events during these years
have an eerie resonance to what’s happening today in 2022. War, conflict,
inflation, recession, and rate hikes were common themes in these midterm years.
Only three of these 10 midterm years had sizable gains: 1938 (War in Europe),
1942 (WWII) and 1982 (Secular Bull). Losses carried over into Q2 in all but 3
years: 1938, 1942 and 2018. Third quarters rebounded in all but three years:
1966 (Vietnam), 1974 (Oil Embargo/Watergate) and 2002 (Iraq). The only real Q4
blemish was 2018 when the Fed hiked rates too briskly.

In general, after a down midterm Q1, losses tended to carry
over into Q2 and the market began to find its footing in Q3 and rally into Q4. Protracted
crises in 1962, 1966, 1970, 1974, and 2002 delivered the most negative results
though all had significant bear market bottoms. At the Q1 crossroads in 2022 we
are faced with similar conditions. Persistent hyperinflation (Jeff’s large iced
black coffee is up 29% in the last month from $3.02 to $3.89), a rising rate
environment that’s stoking inverted yield curve/recession fears, the brutal war
in Ukraine and the new Cold War 2.0
with Russia are threatening a bear market on the backdrop of the heightened
volatility
we have been warning of since our Annual Forecast
in December.

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