The following is the S&P 500 chart for 2012.
*Read the entire history of the U.S. stock market here.
Jan 11, 2012: EU GDP release said that Germany was in small recession in Q4 2011. But the U.S. stock market doesn’t care anymore. People expect the EU will have mild recession in 2012 anyways.
Throughout the entire Q1 2012, Bernake repeatedly stated that the Fed is in a “wait and see mode”. He said QE3 certainly is an option, but not sure if it’s needed right now.
There was a medium sized 10.9% correction from beginning of April – end of May 2012. Halfway during the April-May correction (in early May), Greece fears sprang up again. The Greek election failed to result in a clear winner (and hence no government), so there was a chance that the far left Greek party could form a government. This party wanted to reject the bailout package and was anti-austerity (the EU demanded that Greece begin austerity measures in exchange for the bailout). Some feared (again) that Greece would really the EU this time.
Our quantitative model could not predict this medium sized correction. We believe that Greek worries were just a bullshit excuse for this correction. There was no cause-effect relationship. Greece was set to have a new election on June 17, 2012, but the S&P bottomed more than 2 weeks before this election. This demonstrates why small corrections are so hard to trade. There’s no way you could have predicted the bottom in late May 2012.
June 20, 2012: Almost 3 weeks after the April-May 2012 correction’s bottom, the Fed announced an extension of Operation Twist, which was supposed to end in late June 2012. The new end date for Operation Twist became the end of 2012.
Throughout the entire summer of 2012, Bernake reiterated “we’ll implement additional measures (i.e. new rounds of QE) if needed”.
September 6, 2012: the ECB announced its own QE. The S&P spiked on this day because of this news.
September 13, 2012: the Fed announces QE3. The S&P spiked up for 1 day on the news, but this was the top before the mid-September to mid-November 2012 correction (8.8%). This demonstrates that small corrections are impossible to predict. Fundamentals and policies like QE3 may be clearly bullish for the long run, but you have no idea what announcements will be “buy the news” and what announcements will be “sell the news”. Trying to guess is futile.
Some people attribute the mid-September to mid-November 2012 correction to the bursting of Apple’s stock bubble (Apple stock was clearly in a bubble in 2012). Others attribute it to a weak Q3 2012 earnings season. We disagree with both of these points. Apple was big, but it was not big enough to move the entire market. Likewise, the main part of this decline occurred in November, not during the October earnings season. In addition, earnings reports in October were ok (banks were good, tech was bad).
The last leg of the September-November 2012 correction was tied with the “fiscal cliff”. Basically Republicans threatened to shutdown Congress. The S&P fell on fiscal cliff worries, then started to rise in mid-November 2012 when rumors arose stating that Congress was close to avoiding the fiscal cliff.
However, you have no idea when the markets will be afraid of the government’s fiscal problems, because the S&P often goes up during government shutdowns! There’s no point in guessing. For example, in October-November 2012 the S&P moved in tandem with fiscal cliff worries. However, the S&P completely ignored the 2013 government shutdown!
Throughout December 2012, the S&P went up but in a very choppy manner. Investors wanted the fiscal cliff worries to end.
The fiscal cliff was avoided when Congress struck a deal on December 31, 2012 at the last minute. From here on end, it would be easy sailing:
- the U.S. economy was on solid ground
- the U.S. fiscal cliff was avoided
- most of Europe’s problems were solved, at least temporarily.
That’s why the S&P SOARED in 2013. The S&P soars during quiet years when the economy is growing nicely.