With another month of US equity returns in the books, it’s time to update our analysis of how the S&P 500 performs in years when it has an outsized return in January like this year. Abnormal large January returns have been a historically clear signal about market direction in the following months, and that phenomenon has generally worked in 2019:
- The S&P 500 rose 7.9% this past January, which is one standard deviation above this month’s average return of 1.2% since 1958 (first full year of data).
- There have been just 8 other Januaries that have also returned +1 standard deviation above the average, or just 15% of the time. These years include: 1961 (+6.3%), 1967 (+7.8%), 1975 (+12.3%), 1976 (+11.8%), 1985 (+7.4%), 1987 (+13.2%), 1989 (+7.1%), and 1997 (6.1%).
- The S&P finished higher 75% of the time in both February and March of those 8 years after an outsized January return. The average return in February was +1.4% for those 8 years compared to +3.0% this year. The average return in March for said years was +1.5% versus +1.8% during that month in 2019.
The S&P also gained an average of +2.2% in April and was positive in +60% of those 8 years. This April beat the average, up +3.9%.
So far so good… until this month when US-China trade negotiations went south. With only one trading day left, the S&P 500 is down 5.3% this May. That’s an anomaly: out of the 8 years with a strong January return, the S&P has only been negative twice in May. It fell 5.2% in May 1967 and dropped 1.4% in May 1976. Even still, the S&P ended higher by 24% on a total return basis during both years.
With three out of four months working thus far, here’s how the rest of the year usually shapes up during years with big January returns:
- June: The average return was +2.1%. The lowest was -2.9% in 1961 and the highest was +4.8% in 1987.
- July: The average return was +2.7%. The lowest was -6.8% in 1975 and the highest was +8.8% in 1989.
- August: The average return was minus 0.5%. The worst was -5.7% in 1997 and the best was +3.5% in 1987.
- September: The average return was minus 0.1%. The weakest was -3.5% in 1985 and the strongest was +5.3% in 1997.
- October: The average return was minus 2.5%. The lowest was -21.8% in 1987 and the highest was +6.2% in 1975.
- November: The average return was +1.3%. The worst was -8.5% in 1987 and the best was +6.5% in 1985.
- December: The average return was +2.8%. The weakest was -1.2% in 1975 and the strongest was +7.3% in 1987.
As you can see, the back half gets choppier with the S&P down on average from August through October before rising into the New Year. As for the next couple of months, both are up on average and could give the S&P the opportunity to recover some of this month’s losses depending on how trade talks develop.
Nevertheless, even with trade risk – something that markets knew about at the start of the year and still managed to rally US stocks strongly in January – the history of such years provides some hope for the remainder of 2019:
- Every “strong January” year except 1987 saw double digit annual total returns for the S&P.
- The total returns for each year were: 1961 (+26.6%), 1967 (+23.8%), 1975 (+37.0%), 1976 (+23.8%), 1985 (+31.2%), 1987 (+5.8%), 1989 (+31.5%), 1997 (+33.1%).
- The average total return for these years was 26.6%. This year, the S&P is up 11.3% YTD.
- The earliest month when the S&P reached its peak for the year was in mid-July 1975. The next earliest was in late August 1987.
The rest of years peaked in September or the fourth quarter. The S&P reached its highest level in September during 1967 and 1976. The S&P also hit its high in early October during 1989, and peaked in December in 1961, 1985, and 1997.
The upshot: the 8 years with abnormally strong January returns mostly occurred in mid-to-late cycle periods, like where we are now. This data shows upside ahead despite a rocky May. If you are worried about trade talks, Fed Funds Futures give a greater than 50% chance for a rate cut in September and December. That could help soften the sting of more negative tariff headlines along with the historical strong January data on the S&P’s side.