The S&P 500 finished January down 5.3 pct, one of the 5 worst performances for this month since 1980. As we continue to note, that’s one cautionary sign for 2022 because history shows January’s performance is generally indicative of rest-of-year returns. Here’s a quick review of the data:
- As a baseline, the S&P’s average January return is +1.2 pct.
- Since 1980, the S&P has been positive in January 60 pct of the time (up 4.1 pct on average) and higher in 84 pct of these years (up 15.5 pct on average for the whole year).
- The S&P has been negative in January 40 pct of the time (down 3.5 pct on average) and ended the year higher 65 pct of the time (but up just 3.6 pct on average).
Takeaway: 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). Even if you exclude the worst performing year of 2008 (-38.5 pct), the average annual return for years when January was negative is just +6.2 pct.
So what does this mean for the S&P 500’s performance in February? Here’s the data:
- As a baseline, February’s average return is -0.1 pct.
- When the S&P has been down in January (average -3.5 pct) since 1980, it has fallen by 1.1 pct on average in February, or slightly worse than the average.
The worst return was -11.0 pct in February 2009 and the best return was +5.5 pct in February 2015. If you exclude that -11.0 pct outlier, the index was still down an average of -0.5 pct in February.
- When the S&P has been down in January, it was also down in February just over half (53 pct) of the time (down 4.3 pct on average).
When the index has been down in January, it has been higher in February just under half (47 pct) of the time (up an average of 2.5 pct).
Takeaway: when the S&P is down in January, it’s a coin toss as to how the index will perform in February. That said, history says the risk skews to the downside. Down Januarys more often tend to flow into difficult Februarys rather than see some snapback.
Given that the S&P performed especially poor this January (4th worst since 1980), here’s how the index did in the February directly following the 5 worst January returns over the last +4 decades prior to this year:
- 2009: January (-8.6 pct) and February (-11.0 pct)
- 1990: January (-6.9 pct) and February (+0.9 pct)
- 2008: January (-6.1 pct) and February (-3.5 pct)
- 2000: January (-5.1 pct) and February (-2.0 pct)
- 2016: January (-5.1 pct) and February (-0.4 pct)
- Average: January (-6.3 pct) and February (-3.2 pct)
Takeaway: a particularly bad January return tends to carry over into the next month. The worst February returns after outsized negative January returns were after the Fed raised interest rates to cycle-high levels in 2000 and amid the Financial Crisis in 2008 and 2009. We are currently under a different environment, but also have another set of challenging issues facing the US economy as the Fed commences on a new rate tightening cycle.
Bottom line: this analysis further supports our view that US equity market volatility should persist in the coming weeks as negative momentum from a particularly poor January performance tends to continue into February. In fact, January 2022 set the tenor for the same narrative investors will need to negotiate for the rest of this year barring an exogenous shock: the size/pace/timing of Fed rate hikes, how inflation prints inform those inputs, and how the first two points impact US corporate profitability. As Nick outlined in last night’s report, Wall Street analysts have been cutting Q1 2022 earnings estimates over the last month. As long as that continues, US equities will keep experiencing choppiness like in January especially with the backdrop of a now hawkish Fed.