I’ve been (correctly) predicting a lot of bad news lately…

Naturally, readers might expect me to be increasingly bearish or pessimistic about the market.

The opposite is true, however.

In my monthly paid newsletters, I have been expressing that I am getting a little bit more bullish and positive about the stock market.

I’ve even been predicting another “bear market rally,” like we saw in July of this year.

[A “bear market rally” is a brief period where stock prices rise during a broader downturn in the markets.]

But just because I’m a little bullish doesn’t mean I’m “super bullish” right now.

So today, I want to combine the arguments and data I’ve presented up to this point.

I want to lay out all the reasons why we might see stocks rise over the next few months, why we might see another crash between December and February 2023, and why I suspect 2023 will ultimately be a really good year for stocks (but only for people who properly position themselves now).

Today, let’s look at the bullish datapoints.

Bullish Datapoint No. 1: Annual Seasonality

Now, I am not a “seasonal” analyst. A seasonal analyst hunts for investment patterns according to recurring patterns in the time of year.

But seasonal analysis sometimes provides compelling insights into what investors should expect during a particular period.

Historically, October and November are the best months to hold stocks.

(I say “hold stocks,” because you want to buy stocks when they’re down in price, before they begin to rise. If you wait to see them rise? You might miss your opportunity to buy at good prices.)

Across every October since 1985, the Nasdaq has averaged a gain of 1.4% (excluding 2008). And across every October since 1952, the S&P 500 has averaged a gain of 1.1% (excluding 2008).

The chart below shows you a “composite view” of how the market has moved on average during the last three months of the year since 1926:

This chart is what we get when we average out every market move for every year between 1928 and now. As you can see, the October 1 through December 31 period is generally quite good.

Why is the end of the year typically so good for stocks?

In the final three months of the year, stocks tend to go up because this is the period when companies — especially retail businesses — tend to generate the bulk of their revenue and profits.

Over the next few months, in America, we’re going to see Halloween, Thanksgiving, Christmas, and Hannukah.

Four major holidays based around gift-giving and consumption.

That is, buying stuff. Something Americans are good at doing even if there’s a global economic recession.

Another thing that maps well to the seasonality chart above: October is usually when companies report their quarterly financial results.

There is typically a “buyback blackout” period of several weeks around the announcement of quarterly results. That is, companies and their executives refrain from issuing any new share repurchases during this time (usually in October).

This buyback blackout period typically lasts until about November 1.

Look at the chart above and see for yourself typically happens to stocks on that date once the anticipation of additional seasonal revenue plus the resumption of buybacks begins.

They tend to go up. A lot.

Bullish Datapoint No. 2: Midterm Elections

2022 is a midterm election year for the U.S.

Presidential elections occur every 4 years. But elections for legislators occur every 2 years. These 2-year elections are called “midterms” because they occur in the middle of presidential elections.

According to LPL Research, historically, October in a midterm year has been the best month for stocks:

Also according to LPL Research, stocks have gained an average of 2.7% in October in midterm years. The fourth quarter has historically had the strongest seasonality, and it’s especially true in a midterm year, with gains during the final quarter of a midterm year averaging over 6.5%.

As I write this on October 21, the S&P 500 is already up 3.85% for October so far.

So we’ve already seen above-average gains for the market over the last 3 weeks.

Related to this is another data point suggesting what I said before about 2023 looking good for stock returns…

Since 1950, stocks have always gained in the year following U.S. midterm elections. It’s happened every time, regardless of who wins the election.

I know I’ve mentioned this before: Past performance is no guarantee of future results.

But when something has happened 100% of the time before? It certainly leads me to think that we’ll see something similar in the future.

Plus, these trends have persisted historically throughout periods of high inflation, rising interest rates, and looming recessions.

I highly doubt that 2022 is so different and unique that these trends will reverse.

Bullish Datapoint No. 3: Disinflation

In August 2021, I shared with my paid readers some of the econometric work I had been doing for my primary client. I made a prediction about what level inflation we should be seeing by August 2022.

I said this:

If we add another $1 trillion to the U.S. money supply by this time next year…

We can reasonably expect to see inflation go up about 9.2%.

In August 2021, the money supply in the United States was $20.6 trillion. In August 2022, it was about $21.6 trillion.

So the amount of money in the economy went up by close to $1 trillion, as I hypothesized it would.

The actual inflation rate was 8.5% in August 2022. Pretty close to my 9.2% prediction.

A few months ago, I refined the model and made a new prediction.

On the low end, if the Fed manages to shed trillions of dollars from its balance sheet over the next year, the annual inflation rate will be around 0% to 1.3% by August 2023.

On the high end, if the U.S. economy simply sees money supply continue to increase at the same time the GDP contracts due to a recession, we will likely see a 4.5% inflation rate by July 2023 and a 3.4% inflation rate by August 2023.

This is relatively close to economist and consumer inflation expectations over the next year, which range from 4.8% to 6.22%.

But if you take a weighted average of these two scenarios…

You get a midline between these two extremes, which is my official prediction for what inflation will be in August 2023: between 2% and 3.2%.

Now, you should notice something.

Right now, the actual consumer and economist inflation expectations for next year are higher than what my model suggests… or even higher than what we would see arithmetically if inflation continues to rise at the high 0.4% rate we saw in September.

For this reason, I think we might see a “disinflation shock” in 2023. That is, a surprising and somewhat unexpected decrease in inflation.

Not a “reversion to normal inflation,” mind you. Inflation might still be high. But if it is lower than what analysts and consumers expect? That is a very positive sign for stocks.

One paper from the National Bureau of Economic Research showed that “Disinflation shocks promoted market booms and inflation shocks contributed to busts.”

“The evidence reported here provides support for the view that unanticipated changes in inflation and interest rates have played important roles in major movements in the U.S. stock market since World War II. We find that inflation and interest rate shocks have large, negative impacts on stock market conditions, apart from their effects on real stock prices. Disinflationary shocks, for example, can help explain the U.S. stock market boom of 1994-2000, whereas inflationary shocks can help explain the bust of 1973-74.”

Simply put, when inflation and interest rates go higher than expected? It has led to stock market crashes.

But when inflation drops sooner than expected? It has led to stock market surges.

Right now, everyone is expecting inflation to stay bad.

So even if inflation is slightly better than “bad,” it will probably cause a disinflationary shock in the markets.

The situation right now actually reminds me of 1974/1975.

Inflation was very high in the early 1970s due to monetary policy changes and supply shocks (much like 2022).

So in 1974, the market fell about -30%.

But in 1975, the market roared up over 31% because inflation came in a little better than expected.

But if you look at both years back to back, something becomes very clear.

Look at the chart above and pretend you had to make a decision to buy stocks (or sell put options on stocks you want to own).

When was the best time to do it?

It certainly looks like the best way anyone could have captured those big gains in 1975 was if investors bought in the last few months of 1974, near the lowest point of a deep, deep bear market and during some incredibly frightening economic conditions.

I suspect that more people will begin talking about deflation and disinflation over the coming months, which could help stocks grow.

Bullish Datapoint No. 4: “TINA”

“TINA” is an acronym in investing parlance that stands for “There Is No Alternative.”

We’ve seen a huge selloff in stocks among all investors, institutional or retail.

For most retail investors, after selling many have been moving their money to safer stocks or holding cash, waiting for the market to look more attractive.

Institutional investors do not really have the ability to do that.

The amounts of money they move in and out of assets come with “carry costs” and “opportunity costs.”

Carry costs are the fees and taxes a business pays for holding inventory — like warehouse storage fees and insurance. For a financial institution, there are costs to carrying a lot of undeployed cash.

Inflation, for example, creates a type of carry cost for any business holding cash, since the value of money is deteriorating over time.

Opportunity costs are what you lose when you have to choose from two or more alternatives. When you invest, you’re ideally making money… but it’s also possible that you’re not making as much money as you possibly could by choosing a different alternative.

Opportunity costs become greater the more money you have to invest.

For example, if you have $10,000 to invest, a 10% return is not much different from an 15% return. We’re talking about a $500 difference in result. So the opportunity cost is pretty low.

Same thing with stock options. You could, for instance, make a little bit more money in high-volatility markets using complicated (and sometimes risky) option trading strategies. But the actual opportunity cost here for regular investors is so small that it doesn’t justify the amount of effort and attention these strategies require.

Now, what if you have $10 billion to invest?

Well, it’s very important to get higher returns if it’s possible, because now we’re talking about a $500 million difference in result. Even though we’re talking about the same percentage differences, the opportunity costs are much higher for institutions.

This is probably fairly intuitive. If you missed out on a chance to make $500, you’d probably be mildly upset but it wouldn’t cause you to lose sleep. But if you missed out on a chance to make $500 million? I think you’d be justified in feeling quite upset!

So right now, because of these opportunity costs, big institutions are looking to deploy their cash.

But where can it go?

Bonds? There is no demand for bonds right now because of quantitative tightening.

That is, central banks around the world that supported the markets by purchasing trillions of dollars’ worth of bonds and mortgage-backed securities (called “quantitative easing”) are now selling these assets back into the market.

But who’s going buy trillions of dollars’ worth of bonds?

No one. That’s why the U.S. bond market is crashing. That’s why a record was just set because literally no one traded the latest issue of 10-year Japanese government bonds. And demand for 30-year U.K. bonds plummeted so much that the Bank of England had to step in and temporarily pivot from quantitative tightening to quantitative easing again.

So how about real estate? Nope. Mortgage rates have exploded at the same time that housing prices have reached close to all-time-highs. The cost of purchase and the high carry cost of homes do not make real estate an attractive asset right now.

What about cryptocurrency? While there’s more and more institutional money in cryptos, that market simply isn’t big enough to handle much more incursion from the financial industry. What I mean is: the global financial services industry alone is worth 11 times what the total value of all cryptocurrencies are. Institutions can’t move into this market without also destroying this market.

What about precious metals and commodities? That’s all crashed too as the U.S. dollar and bond yields have risen.

All the money that exited stocks? It has nowhere to go except back into stocks.

There’s a measure, developed by the Nobel-prize winning economist Robert Shiller, called the “Excess CAPE Yield.” Basically, a positive CAPE yield suggests that stocks are much more attractive investments compared to any other asset.

And as we can see, this number is still positive:

This indicator has always spiked just before enormous positive bull runs in the stock market.

But simply buying stocks when this indicator is positive has led to decent long-term investment returns 100% of the time.

In fact, research from Fisher Investments showed that, in the past, investing in the U.S. stock market produced positive returns 100% of the time after 16 years.

So now, according to the Investment Company Institute, there’s over $4.5 trillion in cash just sitting in money market funds in the U.S. alone.

[A money market mutual fund invests in debt securities characterized by their short maturities and minimal credit risk. For that reason, investors treat money market accounts as a type of interest-earning savings account, and most brokerages automatically invest uninvested cash in money market funds.]

There’s also about $2.2 trillion sitting in the reverse repo market right now. The repo and reverse repo market allows banks to store large amounts of cash for extremely short time periods and earn a very very tiny amount of interest.

That’s a lot of cash sitting around, losing value due to high inflation.

All that money is going to get redeployed by investors and institutions at some point.

And even with the recent selloff, there is no great alternative to stocks.

Bullish Datapoint No. 5: Central Bank Pivoting

It certainly might seem like central banks have been actively trying to annihilate the stock market with their aggressive policies…

But the reality of the matter is that, behind all the bluster and threats, central banks have spent the last several months being quite two-faced about their intentions.

Meaning, publicly, they’ve been telling investors like you that they’re going to continue to hike interest rates until inflation is under control.

But privately, they’ve been assuring financial institutions that they’re ready to begin supporting the markets again in an instant if it seems necessary.

This just happened in the U.K. The bond market was collapsing, so the Bank of England stepped in to support the markets again.

The Swiss government has prepared a “backstop” that would allow the Swiss National Bank to provide funds to any systemically important bank in the event of failure.

The European Central Bank’s rate-setters were in “broad agreement” that the bank should be “ready and prepared” to unleash new stimulus measures in the near future.

And Bank of America says that the U.S. Federal Reserve will shift away from quantitative tightening in 2023 and that this will emerge as a new bull factor for stocks.

I don’t know about you, but I feel much more comfortable walking the precarious tightrope that is investing with the knowledge that world governments have effectively promised that they’re never going to let the markets collapse.

Now… while there are other bullish signs in the market, that’s the fifth and final big indicator that leads me to suspect that stocks will likely climb for the next few months and in 2023 overall.

But just because the evidence suggests something does not mean it is certain to happen.

And if we look at all the evidence, as I will do in my next post, there’s reason to suspect that the opposite might happen, too.

Don’t miss Part 2 of this article right here.