Why 2023 will be like 1967’s ‘Summer of Love’ for the stock market

Hot inflation and recession fears. The Fed interest rate hike. Dividing American politics. A regional war overseas with global repercussions. I’m not talking about 2022 – I’m talking about 1966.

A familiar set of fears weighed on stocks over the year that also gave us the Chevy Camaro, the NFL-AFL merger and “How the Grinch Stole Christmas.” But a year later, 1967 delivered not just the “Summer of Love,” but also a stunning rally for stocks as economic fears faded. This year has been oddly 1966ish. Expect a surprising 1967-like bull market in the coming year.

Markets always move the most on surprises – the discrepancies between expectations and what ends up happening. When political, cultural and economic fears are excessive, even minor positives offer a powerful advantage. Anything less worse than feared triggers bullish relief. Bear markets naturally create excessive pessimism.

American forces in Vietnam in 1966.

In 1966, the S&P 500 suffered a minor bear market – a 22% rout that started in early January and bottomed out in October (yes, just like 2022). The Vietnam War escalated. Significant social and infrastructural legislation comes on top of divisive midterm elections. The disdain for President “LBJ” was different, but parallel in many ways, to the sentiment of many voters for President “Brandon.” Inflation exploded. So the Fed raised short-term interest rates – less than today – but by historical standards in a significant, steady and scary way.

Chart S&P 500 1966-67 and 2022-2023

Recession fears reigned. Bears like to talk about “surrender” – that panicked, violent, cascading sell-off that usually ends bear markets. They also liked to talk about it in 1966. But the capitulation never came. Instead, October started a new bull market, with stocks rising just as they rose this quarter. After a stealthily positive fourth quarter of 6%, stocks soared 24% in 1967.

The sentiment in 2022 was – and still is – not good when it comes to stocks. Virtually all surveys show boldness, such as the American Association of Individual Investors’ Retail Investor Gauge. The University of Michigan consumer sentiment survey is near all-time record lows, which only happens when higher prices loom. A recession of 2023 is massively expected. At least 68% of respondents to Bank of America’s global fund manager survey expect one.

Consumer Sentiment Chart
University of Michigan
Federal Reserve Chart
Federal Reserve Bank of St. Louis

The reality is brighter. A large minority also expected us to be in a recession in the last quarter. But third-quarter US GDP grew surprisingly strong at an annualized 3.2%, reversing two quarterly declines (influenced by inventory change and imports). Almost all other major countries recorded positive and improved GDP growth.

Nevertheless, consensus on recession forecasts still increased. This, notice, was not a bad thing. The more companies expect a recession, the more they prepare for it. Businesses have spent this year cutting inventory and staffing levels. As a result, a recession has become less likely and, if it does occur, it will be milder than it otherwise would have been. The warning is a mitigation.

Likewise, the CEOs of nearly every major bank – from Jamie Dimon to Jane Fraser – have long and often openly trashed the US economy and predicted a recession. But recessions always lead to a sharp increase in default rates on their loans, which crushes profits. If these bankers were really afraid of defaults, these bankers would probably have scuttled their loans by now.

Lyndon B Johnson in 1968.
Lyndon B Johnson served from 1963 to 1969.
Hippies in San Francisco in 1967.
When political, cultural and economic fears are excessive, even minor positives offer a powerful advantage.

They did not do it. As I noted in this Dec. 13 column, U.S. loan growth in November hit 11.8% year-over-year, accelerating from 4.0% at the end of 2021, showing a monthly growth that is particularly incompatible with the impending recession. Ditto for global loan growth, which has been rising every month since March.

Are you scratching your head? Look at what banks do, not what they say. What they say is sentiment. What they are doing is reality.

And the Fed hikes? Everyone thinks it kills the economy. Usually they do. But each time they raised rates this year, loan growth has galloped faster. Why? Because the future profitability of bank loans now increases with rate hikes. And when they lend, borrowers spend. They don’t sit on it. Historically, bank lending costs have generally been the day-to-day cost of bank borrowing controlled by the Fed. Not now, as I also noted here on December 13.

For this reason, today’s much-vaunted “inverted yield curve” fears – 3-month Treasury yields outpacing 10-year rates – are overblown. In September 1966, the Fed also inverted the yield curve. Yet most of the reversal came later, after stocks bottomed, like this time. And no recession has hit.

San Francisco in 1967
Expect a surprising 1967-like bull market in the coming year. Above, San Francisco in 1967
Corbis via Getty Images

Policy? Like 1966, 2022 was a midterm election year. As I detailed in this November 16 column, midterms create fuel for stock market rockets – with average returns of more than 18% in the third years of US presidents’ terms. They were even stronger, averaging 28%, when the second year was negative, as were 2022 and 1966. Stocks jumped 24% in 1967.

Unlike 1967, 2023 bond yields are expected to be positive, reversing 2022 as 2023 inflation risk wanes, as I also noted in this column. Long-term interest rates will price this risk lower.

Despite all of this, I hear what you’re saying: 2022 hasn’t been pretty. Pessimism seems like a safe and comfortable bet. But it may also be possible that people have been preparing for the worst for quite a long time.

As we ring in the New Year, I would suggest instead preparing for a pleasant surprise. I can’t promise another “Summer of Love” for 2023 when it comes to sex, drugs or rock ‘n’ roll. But I believe the New Year will bring a surprisingly strong stock market globally.

Ken Fisher is the Founder and Executive Chairman of Fisher Investments, a four-time New York Times bestselling author, and a regular columnist in 17 countries around the world.

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