Hot inflation and recession fears. Fed rate of interest hikes. United States Politics. A regional war overseas with global repercussions. I’m not talking about 2022 – I’m talking about 1966.
A well-known set of fears plagued stocks throughout the 12 months that also gave us the Chevy Camaro, the NFL-AFL merger, and How the Grinch Stole Christmas. But a 12 months later, 1967 brought not only a “summer of love”, but additionally a dizzying stock rally as economic concerns faded. This 12 months was eerily much like 1966. Expect a surprise bull market reminiscent of 1967 in the coming 12 months.
Markets all the time move the most to surprises – gaps between expectations and what actually happens. When political, cultural, and economic concerns are excessive, even small positives yield powerful advantages. Anything that’s less worse than feared causes bullish relief. Bear markets naturally construct excessive pessimism.
![Vietnam battle scene in 1966.](https://nypost.com/wp-content/uploads/sites/2/2022/12/vietnam-war-221223-22.jpg?w=1024)
In 1966, the S&P 500 suffered a minor slump, a 22 percent drop that began in early January and bottomed out in October (yes, same as in 2022). The escalation of the war in Vietnam. Necessary social and infrastructure provisions were added to the divisive mid-term elections. The contempt for President “LBJ” was different, but in some ways parallel, with many citizens’ fondness for President “Brandon”. Inflation exploded. So the Fed raised short-term rates of interest – lower than today – but by historical standards significantly, systematically and appallingly.
![S&P 500 chart 1966-67 and 2022-2023](https://nypost.com/wp-content/uploads/sites/2/2022/12/SP500-1966-and-2022.png?w=1024)
There have been fears of a recession. Bears like to speak about “capitulation” – that panicky, violent, cascading sell-off that sometimes ends bear markets. In addition they liked to speak about it in 1966. But give up never got here. As an alternative, October kicked off a recent bull market, with stocks rising the same way they’d been rising this quarter. After a stealthy 6% positive in the fourth quarter, stocks rose 24% in 1967.
Sentiment in 2022 was not – and still is just not – good relating to stocks. Virtually all research points to bleakness, as does the American Association of Individual Investors’ Retail Investor Index. The University of Michigan consumer sentiment survey is hovering around record lows – which only happens when higher prices are imminent. A recession is overwhelmingly expected in 2023. As many as 68% of respondents to the Global Fund Manager survey conducted by Bank of America expect such an answer.
![Consumer sentiment chart](https://nypost.com/wp-content/uploads/sites/2/2022/12/consumer-sentiment-2.png?w=1024)
![Federal Reserve Chart](https://nypost.com/wp-content/uploads/sites/2/2022/12/fed-data-2.png?w=1024)
The truth is brighter. A big minority expected that we were also in recession in the last quarter. But US GDP in the third quarter grew surprisingly strong by 3.2% year-on-year, reversing two quarterly declines (distorted by changes in inventories and imports). Just about all other large countries recorded positive, higher GDP growth.
Despite this, the consensus of expectations for a recession has increased anyway. That, mind you, wasn’t all bad. The longer corporations anticipate a recession, the more they prepare. Corporations have spent the 12 months cutting inventory and reducing staff numbers. In consequence, a recession has grow to be less likely, and if it does occur, it will be milder than it otherwise would be. The warning is a mitigation.
Similarly, the CEOs of nearly every major bank, from Jamie Dimon to Jane Fraser, have openly, long and sometimes destroyed the US economy and predicted a recession. But recessions all the time cause their loan default rates to skyrocket, which lowers their income. If these bankers were really afraid of default, they probably would have stopped lending way back.
![Lyndon B. Johnson in 1968.](https://nypost.com/wp-content/uploads/sites/2/2022/12/lbj-221223-18.jpg?w=1024)
![Hippies in San Francisco in 1967.](https://nypost.com/wp-content/uploads/sites/2/2022/12/summer-love-221223-24.jpg?w=1024)
They don’t. As I noted on this column on December 13, November US credit growth reached 11.8% year-on-year, accelerating from 4.0% at year-end 2021, showing a monthly increase that is especially inconsistent with the looming recession. The identical goes for global credit growth, which has been increasing every month since March.
Are you scratching your head? Watch what banks do, not what they are saying. What they are saying is sentiment. What they do is real.
What about Fed hikes? Everyone thinks they’re killing the economy. Normally yes. But each time they raised rates of interest this 12 months, credit growth galloped faster. Why? Because the future profitability of bank lending is now rising with rate of interest hikes. And once they borrow, borrowers spend. They do not sit on it. Historically, the cost of bank loans has typically matched the cost of overnight loans from Fed-controlled banks. Not now, as I also noticed here on December thirteenth.
Because of this, today’s widespread fears of an “inverted yield curve” – 3-month government bond yields exceeding 10-year rates – are exaggerated. In September 1966, the Fed also inverted the yield curve. Nevertheless, most of the inversions happened later, after the stock bottomed out, like this time. And there was no recession.
![San Francisco in 1967](https://nypost.com/wp-content/uploads/sites/2/2022/12/GettyImages-576839772.jpg?w=1024)
Policy? Like 1966, 2022 was a mid-term election 12 months. As I detailed on this November 16 column, the mid-term elections yield rocket fuel in the stock market — a median of over 18% returns in the third 12 months of US presidents’ terms. They were even stronger, averaging 28% when the second 12 months was negative, as were 2022 and 1966. The stock was up 24% in 1967.
Unlike in 1967, bond yields in 2023 should be positive, reversing in 2022 as the risk of inflation in 2023 declines, which I also noted on this column. Long-term rates of interest price this lower risk.
Despite all this, I hear what you might be saying: 2022 has not been pretty. Pessimism seems like a protected and convenient bet. But possibly it is also possible that folks have been preparing for the worst long enough.
As we enter the Latest Yr, I’d suggest preparing for a pleasing surprise as an alternative. I am unable to promise one other “Summer of Love” for 2023 relating to sex, drugs or rock’n’roll. Nevertheless, I think that the Latest Yr will bring a surprisingly strong stock market around the world.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time Latest York Times bestselling writer, and a daily columnist in 17 countries around the world.