Our historical playbook analysis of what happens after the S&P 500 has outsized gains in January is back on track, and has worked every month this year expect May. To reprise, abnormally strong January returns have been a historically clear signal about market direction in the subsequent months. Here’s how it has shaped up so far this year:
- January: The S&P 500 increased 7.9% this past January, one standard deviation above this month’s average return of 1.2% since 1958 (first full year of data).
There have 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%).
- February and March: 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 said years compared to +3.0% this year. The average return in March was +1.5% versus +1.8% this year.
- April: 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%.
- May: This was the first month when the “strong January playbook” went off track. Out of those 8 years (prior to 2019) with a strong January return, the S&P was up 1.9% on average in May and had only been negative twice. The S&P was down 6.6% this past May.
On a more positive note, both prior two years when the S&P ended in the red in May (1967 and 1976) finished the year higher by 24% on a total return basis.
- June: The average return during this month was 2.1% in years with a big January performance and the S&P ended higher 75% of the time. Thus far, the S&P is up +3.10% this month, so it’s safe to say it will close positively in June with just two trading days left.
The upshot: four out of five months in 2019 have worked in line with historical averages. Here is how the back of the year usually goes during years with large January returns:
- July (good): The average return was +2.7% and the S&P was up +60% of the time during said eight years. The lowest return was -6.8% in 1975 and the highest was +8.8% in 1989.
- August (bad): The average return was negative 0.5% and the S&P was down +60% of the time. The worst return was -5.7% in 1997 and the best was +3.5% in 1987.
- September (bad): The average return was negative 0.1% and the S&P was lower +60% of the time. The weakest return was -3.5% in 1985 and the strongest was +5.3% in 1997.
- October (really bad): The average return was negative 2.5% and the S&P was down +60% of the time. The lowest return was -21.8% in 1987 and the highest was +6.2% in 1975.
- November (good): The average return was +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 return was +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.
As we cautioned in last night’s note, the second half of the year is typically choppier. The VIX has peaked for the year the most in August and October since it was created in 1990, for example. Even in years with momentum from robust January returns, this data still fits that volatility narrative. August to October not only sees more market churn, but the S&P is also usually lower during those months even in a year like we are currently experiencing. November and December tend to help recover those losses, however.
As for how these years typically perform overall, here’s the data:
- Every “strong January” year except 1987 saw 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 average total return for these years was 26.6%. This year, the S&P is up +16.2% YTD.
- The earliest month when the S&P reached its high for the year was in mid-July 1975, followed by 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.
As we continue to highlight, the 8 years with abnormally strong January returns mostly occurred in mid-to-late cycle periods, like where we are now.While the S&P is typically higher in July during these kinds of years, we think the widening mismatch between Fed action and investors’ rate expectations will ramp volatility higher. So will ongoing US-China trade negotiations. Therefore, we are cautious on US equities until October, but believe the S&P will finish the year in positive territory from here.