January Indicator: An Update

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January Indicator: An Update

The S&P 500 is down 7.5 percent so far in January, the second worst performance for this month since 1980. That’s a bad omen for 2022, because history shows January’s performance is generally indicative of rest-of-year returns:

  • As a baseline, the S&P 500 has been up 1.0 pct on average in January since 1980.
  • The S&P has been negative in January 40 pct of the time (down 3.5 pct on average) and still ended the year higher 65 pct of the time (up 3.6 pct on average).
  • That said, the S&P was positive in January 60 pct of the time (up 4.1 pct on average) and this index was higher in 84 pct of these years (up 15.5 pct on average).

The upshot: when the S&P is down in January (a relatively uncommon event), it tends to generate a lower annual return versus when it is positive in the first month of the year (average annual return of +3.6 pct versus +15.5 pct). Excluding the worst performing year of 2008 (-38.5 pct), the average annual return for years when January was negative is still only +6.2 pct.

Now, since January 2022 is especially rocky, here are the five worst Januarys for the S&P 500 back to 1980 and how the rest of the year turned out:

#1: January 2009: S&P down 8.6 pct

  • End of January through December 31st: +35.0 pct
  • Annual return: +23.5 pct
  • Bottom for the year: March 9th

Comment: 2009 had the worst start to the year of any January since 1980. Stocks bottomed that March, however, in large part because the Federal government had just enacted the post-Financial Crisis American Recovery and Reinvestment Act of 2009 (ARRA) the month before.

#2: January 1990: S&P down 6.9 pct

  • End of January through December 31st: +0.35 pct
  • Annual return: -6.6 pct
  • Bottom for the year: October 11th

Comment: this was the second worst performing January in the last 4 decades amid a weakening economy and restrictive monetary policy as the Fed tried to tamp down inflation. Stocks recovered little of these losses the rest of the year due to an oil price spike caused by the Iraqi invasion of Kuwait in August.

#3: January 2008: S&P down 6.1 pct

  • End of January through December 31st: -34.5 pct
  • Annual return: -38.5 pct
  • Bottom for the year: November 20th

Comment: this January came one month after the start in December 2007 of what would later be known as the Great Recession caused, of course, by the Financial Crisis.

#4: January 2000: S&P down 5.1 pct

  • End of January through December 31st: -5.3 pct
  • Annual return: -10.1 pct
  • Bottom for the year: December 20th

Comment: post Y2K, the Federal Reserve raised interest rates to cycle-high levels, setting the stage for the collapse of the dot com bubble.

#5: January 2016: S&P down 5.1 pct

  • End of January through December 31st: +15.4 pct
  • Annual return: +9.5 pct
  • Bottom for the year: February 11th

Comment: concerns about a slowdown in China and declining oil prices caused this month’s negative return, but US equities staged a comeback as the US did not enter a recession.

Bottom line: history shows that despite a particularly poor performing January for the S&P, it can bottom early in the year if a) the US does not enter recession amid headwinds, or b) the Federal government passes meaningful fiscal stimulus. As of now, the latter is unlikely especially with midterm elections later this year, so it’s up to the Fed to not let the US economy tip into recession as they raise rates this year.