We would all like to know where the market will be in a month, or a year. In the absence of a crystal ball, we can look back at market data through a historian's lens.
I believe historical patterns, when considered in the appropriate context, can help investors build conviction about future trends.
Here, I'm focusing on 3 recent shifts that in the past represented positive news for the economy, the stock market, and cyclical sectors.
About the expert
Denise Chisholm is Director of Quantitative Market Strategy for Fidelity, where she focuses on historical analysis and its application in diversified portfolio strategies. She joined Fidelity in 2007 as a global equity analyst.
1. Real wage growth has accelerated
A year ago, income gains were being wiped out by high inflation. Not anymore. Since last year, inflation-adjusted hourly earnings have gone from worst to first, reaching the top quartile of all readings going back to 1965.
Historically, higher real earnings growth has been associated with lower chances of a recession. Since 1965, there was just a 1.4% chance of a recession in the 12 months following top-quartile wage growth. At the other end of the spectrum, in the bottom quartile, a recession followed 6.4% of the time.
2. Residential investment may be coming off a low point
There's an old adage: "As housing goes, so goes the economy." Residential investment, which includes home purchases, contracted 20% for the 12 months through June 2023—easily in the bottom quartile of its range since 1962. But housing sales and starts have since risen, suggesting housing may be making a recovery. In the past, when residential investment accelerated from bottom-quartile levels, both the economy and the stock market tended to advance over the next 12 months.
3. Leading economic indicators have improved
Leading economic indicators (LEIs) are indicators that tend to turn around before the broader economy does, such as consumer expectations and the yield curve. A composite of LEIs that I track has improved recently after falling into the bottom quartile of its historical range in the second quarter. Since 1960, after LEIs reached bottom-quartile levels, stocks advanced over the next 12 months 88% of the time.
What this may mean for stocks
In the past, when these 3 turning points occurred—in inflation-adjusted wage growth, residential investment, and LEIs—it has been good news for the stock market over the next 12 months. More specifically, it's been bullish for cyclical sectors, which have historically outperformed defensive sectors in that timeframe.
The bottom line
To be sure, history isn't a foolproof guide, but I believe these 3 shifts hint at a positive outlook for the economy and stocks generally, and particularly for cyclical sectors.