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Why the Stock Market Will Be Higher in One Year

One of the major “rules” of Wall Street is that you don’t make predictions about the stock market as a whole. 

You likely have heard the sentence – “Well, I don’t take a view on the stock market.  I just pick stocks.” 

We don’t have a problem with this approach.  A high-quality stock picking or trading strategy should be able to produce good performance in any kind of market environment. 

This is true of both our TRADING and INVESTING strategies.  The trading strategy we use in HX Trader produced a decent absolute return (+9%) in the awful Bear Market of 2022 despite only having long ideas… 

The idea behind not having a view on the overall stock market is that it is impossible to be able to predict what the stock market is going to do. 

We strongly disagree with this idea.  Our view is NOT a popular opinion on Wall Street. 

Long-term we think the data is overwhelming.  The stock market goes UP! 

If you look at every 30-year rolling period in US stock market history has been up 100% of the time.  

The WORST performance across that long of a period was an 8% annual return.  Meaning if you invested at the WORST time and held for 30 years, you would have made almost TEN TIMES your money. 

The US economy grows and we have great companies that create economic value and care about shareholders.  The result is an upward trend in the stock market. 

Even across shorter time frames, the odds are pretty heavily stacked in your favor. 

Here is a good table from one of our favorite financial authors showing the likelihood of one- to five-year periods being positive in the stock market…. 

If you are patient, making money in the stock market is a very high probability bet. 

In the short term, though, a lot can happen. 

Through time the stock market is up 54% of all days and 60% of all months.  This means that almost half the time in the shorter term you lose money. 

We agree that predicting the next day or month is virtually impossible. 

In the intermediate term – say six to twelve months - we disagree.  We believe it IS possible to make high-probability bets on the direction of the stock market across this time frame.  SOMETIMES… 

The data says that the stock market is up about two-thirds of the time across these periods.  That is a pretty good bet but not necessarily good enough for us. 

Sometimes, though, the data lines up in a way that can give a much higher probability bet. 

Many of you know my parents met in Reno, Nevada and for the last few decades of his life, my father was a professional gambler.  I grew up around gambling and understanding probabilities. 

The example we like to use is blackjack.  If the dealer deals a lot of low cards in a fixed deck shoe (meaning there is a limited number of cards to be dealt), then the likelihood of a “10” value card increases. 

This doesn’t mean that the next card WILL be one but the chances are greater.  If you understand this, you will change your bets accordingly. 

This is how we look at the intermediate-term data.  There are no guarantees but if you know the odds are stacked in your favor, you might bet a little differently. 

We mention this because we recently saw a very rare occurrence happen in the stock market. 

With the March S&P 500 performance of +3.10% for the month, the S&P 500 has now closed +1% or greater for five months in a row. 

This has only happened TWELVE times in the last 79 years. 

Below is a great table from one of our favorite investment research shops – Bespoke Investment Group. 

In the table you can see that when this happens, the next month is positive 58% of the time. This is slightly below the 60% average across all periods since 1945…

This means there is a slightly higher probability that the stock market corrects.

Looking out six to twelve months, though, and the data is overwhelming. The S&P 500 is higher 91.7% of the time in six months and 100% in the next twelve months. Also, look at the returns and you will see that not only is it up but it is up more than normal.

This makes sense. 

Last week, we spoke a lot about stock market trends. The fact that we see something happen that has only happened twelve times in almost 80 years speaks to the strength and unique nature of the current trends.

Does this mean that it is guaranteed that the stock market will be up one year from today?

No! Not at all…

A lot can happen in the world. In the last five years, we have seen both multiple wars and the incredible events of COVID. Never say never.

Just the same way you can have a fantastic hand at the blackjack table and STILL lose once the dealer deals you the cards.

What it does mean, though, is that you should bet your hand differently. The odds are on your side in the next year!

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