Even after today’s rally, the S&P 500 is still down 6.2 percent year-to-date, so will US large caps be able to squeeze out a gain this year? There’s still a long way to go in 2022, but the S&P just registered 3 straight years of positive double-digit total returns: 28.5 pct in 2021, 18.0 pct in 2020 and 31.2 pct in 2019. That’s only the 10th time the index has had a 3-peat of +10 pct annual returns in the last +90 years. The reason: markets are very efficient at discounting the future, so it’s not an easy feat to surprise them for 3 consecutive years.
Therefore, with tempered expectations for US equities in 2022, we zeroed in on what happens during years when the S&P has eked out a modest positive total return since 1958 (first full year of data). Here’s what we found:
#1: The S&P has posted a modest positive total return (+0-5 percent) in only 6 years over the last +6 decades versus an average total return of +12.2 pct. These years: 1960 (+0.3 pct), 1970 (+3.6 pct), 1994 (+1.3 pct), 2005 (+4.8 pct), 2011 (+2.1 pct) and 2015 (+1.4 pct). The average: 2.3 pct.
Takeaway: it’s unusual for the S&P to only post a positive return of less than 5 pct. It’s happened less than a tenth of the time (9 pct) since 1958.
#2: During these so-so years, the S&P is usually down in January, but up in February:
- The S&P dropped two-thirds of the time in January in the years mentioned above, and the average return for this month was -2.5 pct.
- The index then rose in all but one of those years in February, and the average return was +2.3 pct.
Takeaway: when the S&P is modestly positive for the year, it typically starts the first month of the year off negative but recovers most of those losses in February. So far this year, the index was down 5.3 pct in January and has fallen by another 1.0 pct thus far in February.
#3: The S&P has only bottomed for the year between Q2 and Q4 when it ends the year up less than 5 pct.
- 1960: October
- 1970: May
- 1994: April
- 2005: April
- 2011: October
- 2015: August
Takeaway: if the S&P is able to finish 2022 in slightly positive territory (+0-5 pct), history says it won’t likely bottom until at least Q2.
#4: On average, the S&P was down 11.9 pct when it hit its intra-year bottom during those 6 instances with mediocre positive annual total returns (+0-5 pct), and it rebounded 13.8 pct on average from the low through year-end.
- The range in returns to the bottom during these 6 years spans from -5.9 pct to -24.7 pct, and the recovery through year-end spans from +4.6 pct to +33.0 pct.
- The biggest downdraft the S&P came back from to end up 0-5 pct on the year was -24.7 pct to the year’s low on a price basis, and up 33.0 pct from there through year-end in 1970 (total annual return of 3.6 pct). That strong snapback came from quick and aggressive monetary policy easing in response to a recession.
Takeaway: there’s a wide range of outcomes in terms of how deep the S&P falls to its low for the year during years when it posts a small gain overall. So far in 2022, the S&P was down 9.2 pct on January 27th which was the bottom for this year as of now. That’s close to the average (-11.9 pct) for the 6 years with gains of +0-5 pct, but as shown in point #3 the annual low does not usually come until at least April rather than the first month of the year.
Bottom line (1): Even if you think the S&P can squeeze out a modest gain (+0-5 pct) in 2022, there’s still likely more pain to come since the index does not typically hit its annual low until at least Q2 during these types of years. As for how much lower that bottom could be, that will largely depend on whether the Federal Reserve can hike near-term rates to tame inflation without creating a recession. The 1970 case study is an interesting one on this count. Inflation started to be an issue for the US economy in the late 1960s. The Fed’s actions in 1970 to address a recession, cutting rates from 9 percent to 5 percent, helped the US economy and stock market recover but kicked the inflation problem “can” down the road. It would not be addressed for another decade.
Bottom line (2): If you think there’s no way the S&P 500 can register even a small gain in 2022, history says to be very cautious here. When the S&P has produced a negative total annual return over the last +6 decades, it has bottomed in the back half of the year all but one time. On top of that, it has never troughed in the months of January through May when it has finished the year in the red on a total return basis. The lows for negative years have come most often in Q4 (77 pct of the time).