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A Better Year for Stock Markets?

Given all the economic disappointments in 2022, the outlook for the new year is quite downbeat, with recession fears dominating much of the conversation. But an old finance-industry heuristic and recent developments in the real economy may now have weakened the pessimists' case.

LONDON – Although it has been almost a decade since I gave up a full-time job in finance, markets – and market oddities – still fascinate me, especially when they send signals that run against a widely held consensus among analysts and investors. Given all the disappointments in 2022, the outlook for the new year is quite downbeat. Major corporations are announcing layoffs, and the International Monetary Fund is forecasting that at least one in three countries will experience a recession this year.

The reasons for such pessimism are not hard to find. The big inflationary surprises of 2022 triggered a massive and rapid tightening of monetary policies in most major economies, and key central banks have continued to talk tough. Although the US Federal Reserve reduced the size of its interest-rate hikes from 75 basis points to 50 bps in December, it has made clear that more rate hikes are likely – and that a rate cut is not in the cards for 2023. Making matters worse, many other problems, like Russia’s war in Ukraine, continue to simmer, threatening supply chains, markets, and economies around the world.

At some point in my career, I was introduced to an old almanac that offered an endless array of heuristics about US stock markets’ past performance. One nugget that always stuck with me is the five-day rule: If the S&P 500 index makes a net gain during the first five trading days of the calendar year, equities will perform well for the year overall. When I asked my colleagues to check it for the 1950-2014 period, they found that it held true more than 80% of the time.

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