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


Hot inflation and recession fears. Spiking rates of interest from the Fed. Divisive US politics. A regional war overseas with global repercussions. I’m not talking about 2022 – I’m talking about 1966.

A well-recognized set of fears dogged stocks throughout the yr that also gave us the Chevy Camaro, the NFL-AFL merger and “How the Grinch Stole Christmas.” But a yr later, 1967 delivered not only the “Summer of Love,” but additionally a shocking rally for stocks as economic fears faded. This yr has been uncannily 1966ish. Expect a startling, 1967-like bull market within the yr ahead.

Markets all the time move most on surprises — gaps between expectations and what actually finally ends up happening. When political, cultural and economic fears are excessive, even minor positives provide powerful upside. Anything that’s less worse than feared triggers bullish relief. Bear markets construct excessive pessimism naturally.

US forces in Vietnam in 1966.AP

In 1966, the S&P 500 endured a minor bear market — a 22% rout that began in early January and bottomed in October (yes – identical to 2022). The Vietnam War escalated. Major social and infrastructure laws added to divisive midterm elections. Disdain for President ‘LBJ’ was different, but in some ways parallel, to sentiment amongst many citizens for President ‘Brandon’. Inflation exploded. So the Fed hiked short-term rates of interest – lower than now – but by historical standards significantly, steadily and scarily.

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

Recession fears reigned. Bears wish to discuss “capitulation” — that panicky, violent, cascading selloff that typically ends bear markets. They liked to discuss it in 1966, too. But capitulation never got here. As a substitute, October began a latest bull market, with stocks rising identical to they rose this quarter. After a stealthily positive 6% fourth quarter, stocks soared 24% in 1967.

Sentiment in 2022 was – and still is – not good in relation to stocks. Virtually all surveys show dourness, just like the American Association of Individual Investors’ retail investor gauge. The University of Michigan’s Consumer Sentiment survey hovers near all-time record lows — which only happens when higher prices are looming. A 2023 recession is overwhelmingly expected. Fully 68% of respondents in Bank of America’s Global Fund Manager Survey expect one.

Consumer sentiment chartUniversity of Michigan

Federal Reserve chartFederal Reserve Bank of St. Louis

Reality is brighter. A big minority expected we were in a recession last quarter, too. But US third quarter GDP grew a surprisingly strong 3.2% annualized, reversing two quarterly declines (skewed by inventory change and imports). Just about all other major nations saw positive, improved GDP growth.

Nevertheless, the recession expectation consensus grew anyway. This, mind you, wasn’t an altogether bad thing. The longer firms expect recession, the more they prepare. Corporations have spent this yr cutting inventories and pruning headcounts. In consequence, a recession has change into less likely, and if it does come, it should be milder than it might have been otherwise. Forewarning is mitigation.

Likewise, the CEOs of virtually every big bank – from Jamie Dimon to Jane Fraser — have openly, long and infrequently, trashed the US economy and predicted a recession. But recessions all the time bring savagely rising default rates on their loans, pummeling earnings. If these bankers were truly scared of defaults, these bankers presumably would have already scuttled their lending.

Lyndon B Johnson in 1968.Lyndon B Johnson served from 1963 to 1969.AP

Hippies in San Francisco in 1967.When political, cultural and economic fears are excessive, even minor positives provide powerful upside. ASSOCIATED PRESS

They haven’t. As I noted on this column Dec. 13, November’s US loan growth hit 11.8% year-over-year, accelerating from year-end 2021’s 4.0%, showing monthly growth that’s notably inconsistent with looming recession. Ditto for global loan growth, which has grown every month since March.

Got your head scratching? Watch what banks do, not what they are saying. What they are saying is sentiment. What they do is reality.

And the Fed hikes? Everyone thinks those kill the economy. Normally, they do. But each time they spiked rates this yr, loan growth galloped faster. Why? Because banks’ future lending profitability rises now with rate hikes. And once they lend, the borrowers spend. They don’t sit on it. Historically, bank lending costs normally paralleled the bank overnight borrowing cost controlled by the Fed. Not now, as I even have also noted here on Dec. 13.

For that reason, today’s much ballyhooed “inverted yield curve” fears — 3-month Treasury yields exceeding 10-year rates — are overblown. In September 1966, the Fed also inverted the yield curve. Yet the majority of the inversion got here later, after stocks bottomed, like this time. And no recession struck.

San Francisco in 1967Expect a startling, 1967-like bull market within the yr ahead.. Above, San Francisco in 1967Corbis via Getty Images

Politics? Like 1966, 2022 was a midterm election yr. As I detailed on this column Nov. 16, midterms create stock market rocket fuel — averaging 18%-plus returns throughout the third years of US presidents’ terms. They’ve been stronger still, averaging 28%, when the second yr was negative, like 2022 and 1966 were. Stocks surged 24% in 1967.

Unlike 1967, 2023 bond returns should flow positive, reversing 2022 as 2023 inflation risk falls, as I even have noted on this column. Long-term rates of interest will price that lower risk.

Despite all of this, I hear what you’re saying: 2022 hasn’t been pretty. Pessimism looks like a protected, comfortable bet. But perhaps it’s also possible that people have been bracing for the worst long enough.

As we ring within the Recent 12 months, I might suggest we as an alternative brace for a pleasing surprise. I can’t promise one other “Summer of Love” for 2023 in relation to sex, drugs or rock ‘n’ roll. But I do consider the Recent 12 months will deliver a surprisingly strong stock market globally.

Ken Fisher is the Founder and Executive Chairman of Fisher Investments, 4 times Recent York Times bestselling writer, and regular columnist in 17 countries globally.

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