During times of market tribulation, I often seek wisdom from the words of Martin Zweig. The legendary investor once asserted: “Patience is one of the most valuable attributes in investing.”

Which brings me to the new year. Sure, the past year was brutal, but you should invest for the long haul, with patience and discipline. Below, I examine historical precedents that offer considerable hope for 2023.

After a volatile year of sharp ups and downs, with promising (but short-lived) bear market rallies, the S&P 500 finally ended 2022 in the red. The index closed down 19.4% for the year, which makes 2022 the worst year for the S&P 500 since 2008, when the global financial crisis hit. Last year’s performance also was the index’s fourth-worst year since 1957, when the index was broadened to include 500 companies.

When COVID emerged in 2020 and continued to wreak havoc in 2021, the S&P 500 still managed to finish those years in the green. For investors accustomed to year after year of bullish markets, the resilience of equities during the pandemic seemed to provide further evidence that stocks remained the best investment game in town.

However, the lousy performance of stocks in 2022 shook investors out of their complacency. The broad slump of stocks last year was a particular shock for many younger investors, who haven’t directly experienced bear markets.

Investors are entering 2023 in a demoralized state and they’re skittish about the coming new year. Who can blame them? Although inflation is cooling, it remains elevated, and the Federal Reserve is determined to continue tightening.

The major U.S. stock indices closed in the red Tuesday, the first trading day of the year. After the opening bell Wednesday, the indices were bouncing between red and green in the wake of weak economic data.

The Institute for Supply Management reported Wednesday that economic activity in the manufacturing sector shrank in December for the second consecutive month, following a 29-month period of growth.

The December Manufacturing PMI came in at 48.4%, 0.6 percentage point lower than the 49% recorded in November and below the consensus estimate of 48.5%. December 2022 was the worst reading since May 2020, when the economy was clobbered by the first wave of COVID. A reading below 50 indicates contraction.

That said, the dip in manufacturing activity could be viewed as bullish, because it’s disinflationary.

The three main U.S. equity benchmarks eventually closed higher on Wednesday, after choppy trading, as follows:

• DJIA: +0.40%
• S&P 500: +0.75%
• NASDAQ: +0.69%
• Russell 2000: +0.64%

Stock market volatility will likely persist in early 2023, as the mix of good news/bad news on the economy continues to play tug-of-war with investor sentiment.

The economy is slowing, and corporate earnings growth is decelerating. Research firm FactSet expects year-over-year earnings growth to come in at -2.8% in the fourth quarter of 2022.

The headwinds can’t be ignored. The bloody Russia-Ukraine war shows no signs of abating, while at the same time China and North Korea are rattling their sabers.

Here at home, the U.S. Congress is mired in bitter gridlock, with the GOP leadership of the House squabbling like kids in the playground. Small wonder investors are confused and gloomy.

But history provides significant encouragement. As the following chart shows, the S&P 500 has rarely posted back-to-back years of declines:

Since 1957, the S&P 500 has only shown consecutive years of negative returns in 1973/1974 and in 2001/2002/2003. Over the past 65 years, the S&P 500 has ended the year in negative territory 18 times (including 2022). On 14 occasions, the index resumed growth the following year.

The S&P 500 on average gained 15% in years following a down year. There’s no guarantee, of course, that this favorable historical pattern will repeat itself this year. But the precedent is bullish.

WATCH THIS VIDEO: A Look at 2022, With an Eye on 2023

If you’re disheartened by the chaos on Capitol Hill, here’s another reason to be optimistic about 2023: the year after midterm elections has generated a stronger performance in equity markets than other years.

U.S. Rep. Kevin McCarthy (R-CA) isn’t having a happy new year so far, as he consistently falls short in the voting to become Speaker of the House. With a razor-thin majority in the House, Republicans are slated to take over the chamber. However, the party is riven by factional infighting, between the right and the far-right.

The White House and Senate remain in Democratic control. For the next two years, don’t expect anything substantive to get accomplished on Capitol Hill. But Wall Street doesn’t care about any of that.

The S&P 500 has historically outperformed the market in the 12-month period after a midterm election, with an average return of 16.3%, regardless of any permutation of political control.

What’s more, markets have gained under nearly all combinations of political control for the White House, Senate and House.

Divided government? Wall Street actually likes it that way, because it lessens the chance that legislation deleterious to investors will get passed.

As for monetary policy, the latter half of 2023 will probably witness an easing of the Fed’s interest rate tightening. Since 1980, in the 12 months after the final Fed rate hike, the S&P 500 was up on average about 15%.

If the labor market remains strong, the U.S. may be able to avoid a recession in 2023. An economic “soft landing” would make companies and consumers less cautious and provide a tailwind for share prices.

So cheer up. The patterns of history bode well for 2023.

Questions or comments? Drop me a line: mailbag@investingdaily.com

And if you’re looking for further guidance in the year ahead, you should know that our analysts have compiled a special report on seven macro predictions.

Our report steers you toward quality, under-the-radar picks in a range of sectors. To download your free copy, click here.

John Persinos is the editorial director of Investing Daily.

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