Our “Strong January Playbook”, or historical analysis of what happens after the S&P 500 has outsized gains in January, has worked nearly every month this year. Abnormally strong January returns have been a historically clear signal about market direction over the balance of the year. Here’s an update of our analysis in terms of year-to-date performance:
- The S&P 500 rose by 7.9% during January 2019, one standard deviation above this month’s average return of 1.2% since 1958 (first full year of data).
There’s only been 8 other Januaries that have also returned +1 standard deviation above the average, or 15% of the time: 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 was higher most of the time every month on average from February through July after an especially robust January return. This year was no different as you can see in the chart following this piece. The only exception was in May when the S&P fell 6.6% due to trade concerns, but it rebounded by 6.9% in June and was also up 1.3% in July.
- By contrast, the S&P has experienced negative returns most of the time in August during these special “Strong January” years, down an average of 50 basis points. It was no surprise then that the S&P dropped 1.8% this past August as we had been warning clients.
- September, however, did better than expected. The average historical return in “Strong January years” during this month is negative 0.1%, with the S&P lower +60% of the time. Last month, the S&P defied this trend with a +1.7% return.
- With just one trading day left in October, the S&P is up 2.4% for the month. The average historical return in “Strong January” years for October is negative 2.5% and the S&P was down +60% of the time. However, excluding the stock market crash in October 1987, it was up an average of 22 basis points. So while this month’s return bests the average, it is directionally in line save the outlier year of 1987.
As for what typically happens in November and December based on years with especially large January returns, here’s a breakdown:
- November (good): The average historical return is +1.3% and the S&P was higher 75% of the time. The worst return was -8.5% in 1987 and the best was +6.5% in 1985.
- December (really good): The average historical return is +2.8% and the S&P was higher 88% of the time. The weakest return was -1.2% in 1975 and the strongest was +7.3% in 1987.
Zooming out for all of 2019, here’s how the S&P has performed overall during years with abnormally strong January returns:
- Every “strong January” year except 1987 saw positive double digit annual total returns for the S&P: 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 S&P was even up in 1987, albeit by single digits.
The average total return for these years is 26.6%. This year, the S&P is up 21.5% YTD.
- The earliest month when the S&P reached its high for the year was in mid-July 1975, followed by late August in 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. It also hit its high in early October during 1989, and peaked in December in 1961, 1985 and 1997.
Bottom line: history points to further gains in November and December, as long as US-China trade tensions and Fed policy decisions don’t veer our “Strong January Playbook” off track. With the S&P up +21.5% YTD, it could inch closer to the “Strong January” annual average return of +27% as we end the year, especially with a robust holiday shopping season.