If you've looked at your portfolio lately, 2022 may not seem like a "sweet spot" for much of anything. The S&P 500 is down more than 22% since the beginning of the year, putting it firmly in bear market territory — defined as a decline of 20% or more from recent highs.
But a "sweet spot" is exactly what Jeffrey Hirsch, a market historian and publisher of the Stock Trader's Alamanac, says investors can take advantage of now.
Hirsch sees the market's decline in the first three quarters of 2022 not as a negative but as a potential entry point for investors. That's because since 1946, the S&P 500 has gained an average of 28.2% over the next five quarters after sinking for the first three of a calendar year, with no losses, according to the Stock Trader's Almanac.
"We think the market is setting up for the best buying opportunity of the 4-Year Cycle," Hirsch recently wrote on his website.
Hirsch, whose reference guide homes in on historical cycles to give investors an idea of the ways stocks will move, thinks now is an opportunity for investors to buy for two main reasons.
- October has been a "bear killer." Historically, investors have often come out of hiding in October. The S&P 500 has started to head up again during that month in 12 post-war bear markets.
No historical stock market trend is perfect: the index suffered major losses in 1978, 1979, 1989 and 1997, and you may have heard of October crashes in 1929 and 1987.
Nevertheless, October has been the highest-returning month in the S&P 500 on average since 1950, according to Stock Trader's Almanac data.
- It's midterm season. Midterm years tend to be rocky ones for stocks, according to Hirsch's data, especially under Democratic presidents. While all midterm years show an average gain of 6% in the S&P 500, midterms under Democratic presidencies have an average gain of 4%. Narrow the list of midterms down to first-term midterms, and there's an average loss of 0.6%. First-term Democratic president midterms: -2.3%.
But out of that shakiness comes high historic average returns. Going back to 1949, the S&P 500 has sported an average return of 20% in the three quarters beginning in October of a midterm election year.
"We're looking at a strong fourth-quarter rally here, right in the sweet spot of the cycle," Hirsch said in a recent webinar.
Investing pros will tell you to avoid making any wholesale changes to your portfolio strategy based on the expectation of short-term gains, whether those expectations are rooted in market history or not. Despite what it's done in the past, the stock market could go down in the short term.
In fact, many of the correlations that Hirsch draws in his analysis rely on the fact that the U.S. stock market has tended to go up throughout its history. And it's natural that the market tends to perform well after a prolonged period of losses, critics might say. After each bear market in history, stock prices have risen to new highs.
If you're a long-term investor, that's sort of the point. Even if you're queasy about the idea of finding the exact sweet spot, if you believe the market will continue to rise over the decades that you plan to invest, a period when stock prices are low is undeniably a great time to buy.
"No one knows where the bottom is, but we do know that stocks are on sale right now," Charles Rotblut, vice president of the American Association of Individual Investors recently told CNBC Make It.
If you have money sitting on the sidelines, financial pros recommend that you invest now, and more importantly, that you keep investing regularly. By putting the same amount of money into a diversified portfolio at a consistent clip — a strategy known as dollar-cost averaging — you guarantee that you'll buy more shares when stock prices are low and fewer when they're high.