2020 is an unusual year for US stocks, and not just due to heightened market volatility accompanying fears about the coronavirus’ impact on the global economy. The S&P 500 ended lower in both January and February, only the 15th year for the index to be down on a monthly basis sequentially at the start of a year since 1958 (first full year of data). A few points here:
- The S&P 500 has declined in both January and February of the same year just a little under a quarter (24%) of the time over the past +60 years. Those years are: 1968, 1969, 1973, 1974, 1977, 1978, 1982, 1984, 2000, 2002, 2003, 2008, 2009, 2016 and 2020.
- In the 14 times that this has happened prior to this year, the S&P has been up the next month (March) just over +60% of the time. The average price return in March was +2.3% during these years.
- After a down January and February, the S&P finished the year higher half of the time. The average return from the close on the last day of February to the end of the year was +3.5%.
With the S&P down 7.0% already this month, here’s what happens when the S&P also finishes March in the red:
- The S&P has only fallen in January, February and March in 8% of years over the last 6 decades. It happened in 1973, 1974, 1977, 1982 and 2008.
- The average S&P monthly return during these years was -3.1% in January (-0.2% this past January), -3.2% in February (-8.4% this past February) and -1.1% in March (-7.0% so far this March).
- During the 5 years when the S&P was down in January, February and March, the S&P finished the year lower 80% of the time and mostly by double digits. The average return from the close on the last day of March to the end of the year was -9.8%.
On a total return basis, these years as a whole were also down 80% of the time or negative by an average of 12.7%: 1973 (-14.3%), 1974 (-25.9%), 1977 (-7.0%), 1982 (+20.4%) and 2008 (-36.6%).
As for what we make of this data, a few closing points:
#1: If the S&P ends March lower (as it is currently headed), it will only be the 6th time the index fell in all 3 beginning months of the year in +6 decades. This negative momentum tends to continue as the S&P usually finishes lower for the year from the end of Q1 on a price basis and for the year as a whole on a total return basis.
#2: In the 5 years when the S&P declined during each month of Q1, four occurred in deep recessionary periods: 1973, 1974, 1977, and 2008. The S&P also fell during each of those years on a total return basis by double digits except 1977 (which was still down by 7.0%). The only year the S&P was higher on a total return basis was 1982 (+20.4%), but that was coming out of a recession, unlike the current economic cycle.
#3: This data explains in part why the White House is now focused on developing a fiscal response to the market’s fears (monetary policy having largely run its course) of a COVID-19 driven recession. Yes, plunging oil prices are an additional factor, but our data shows that it will likely take federal government stimulus to keep the stock market and economy somewhat on the rails as long as virus concerns prevail. When the S&P is down in January and February, it’s basically a coin toss relative to how the index will end the year. When the S&P is down for a third straight month in March, however, the index almost always ends the year lower. That makes March a pivotal month to stop the bleeding. Otherwise, stock market volatility will continue on the threat of recession without anything to ease or help the problem.
The upshot: whether or not US stocks can turn around in the remainder of March will come down to the specifics and timing of a Federal government response.