Anatomy of a Down Year (Q1 Edition)

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Anatomy of a Down Year (Q1 Edition)

US equities are not off to the best start to the year, but not terrible either, with the S&P 500 ending Q1 down 1.2%. While we’re still bullish for 2018, this got us thinking about what a negative Q1 print may say about the rest of this year.

We pulled the total returns on the S&P 500 from NYU Professor Aswath Damodaran’s website from 1958 (first full year of the S&P) through 2017, and focused on just the down years. This way we can see how annual drawdowns shape up performance-wise on a quarterly basis during difficult markets. Here’s a breakdown of the data:

  • Since 1958, when the S&P 500 delivers a negative total return in any given year, the average annual decline is 13.4%.
  • Of the 12 years since 1958 where the S&P declined on a total return basis, the first quarter was negative 83% of the time. The average price return was negative 4.2%. First quarter 2018 was well below average with a 1.2% price decline.
  • During down years, the S&P was also down 75% and 83% of the time in the second and third quarters respectively. On average, the S&P fell 4.6% in the second quarter and 8.9% in the third quarter in such years. The fourth quarter gets a little better with an average price return of 1.1%, but was still down 42% of those years.
  • After years that ended in the red, the S&P was up 75% of the time the next year, for an average total return of 11.6%. The S&P gained an average of 22% in years where the S&P rebounded from the prior year, and was down an average of 19.9% the year after when it fell again.

Bottom line, even though large caps are starting off Q2 lower than when they started the year, we are still positive on equities for the year. First, we’re not superstitious by nature. We take fundamentals as they come rather than rely on historical patterns alone. Second, the S&P 500 has only ended the year lower 20% of the time over 60 years. Lastly, we suspect you’ll see this math from other sources in the coming days. It may dampen investor confidence further, which could make for good buying opportunities in the weeks to come.


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