The S&P 500 has officially ended the first two months of the year in negative territory, a historically uncommon occurrence. So what does that mean for the balance of the year? Three points:
#1: The S&P has ended lower in BOTH January and February during fewer than a quarter (23 percent) of years since 1980 through this year. During the 9 years this has happened excluding 2022:
- The S&P fell an average of 3.6 pct in January versus the overall average of a gain of +1.2 pct. The range was -0.2 pct in January 2020 to -8.6 pct in January 2009.
This year, the S&P was down 5.3 pct in January.
- The index dropped a further 4.3 pct on average in February versus the overall average of -0.1 pct. The range was -0.4 in February 2016 and -11.0 pct in February 2009.
This year, the S&P was down 3.1 pct in February.
Takeaway: US large cap equities’ back-to-back negative performances during the first two months of this year is unusual relative to the last +4 decades. The S&P was down an average of 4.2 pct in January and February of 2022, slightly worse than the average of -3.9 pct during the same two months in the prior 9 years also with a down January and February since 1980.
#2: When the S&P has fallen during both January and February, it has typically recovered some of those losses in March.
- On average, the index was up 1.8 pct in March after a down January and February since 1980. The worst return was -12.5 pct in March 2020 and the best return was +9.7 pct in March 2000.
Excluding the outlier of March 2020, the average March return after a down January – February combination is +3.6 pct.
- After a down January and February since 1980, the S&P was up in March two-thirds of the time.
Takeaway: while the S&P sees some snapback in March after falling in both January and February, on average it is not enough to recover all the losses from the first two months of the year.
#3: Since 1980, during years when the S&P is down in both January and February, the index has more often bottomed in the back half of the year.
- The S&P troughed in 5 out of 9 instances in the back half of the year: once in July, August, October, November and December.
- It bottomed during the first half of the year in 4 out of 9 years: once in February and three times in March.
- The S&P was down 21.9 pct on average through the intra-year low and it was up 31.3 pct on average from the intra-year low through year-end.
February 23rd marks this year’s intra-year low so far, when the S&P was down 11.3 pct.
Takeaway (1): at first blush, it looks like history gives nearly even odds for the S&P to bottom in Q1 versus the back half of the year after a negative performance in January and February. However, two of the years when the S&P bottomed in March include 2009 and 2020, both of which were due to Congress passing fiscal stimulus measures during Q1 in response to the Financial and Pandemic Crises. We do not have the same sort of market/macro setup in 2022, so the early-year low scenario seems less likely.
Takeaway (2): 2022’s current intra-year low return of -11.3 percent is not particularly deep compared to the average (-21.9 pct) of other years when the S&P declined in both January and February.
Bottom line: on the plus side, history says the S&P should recover some losses in March after selling off more than usual in the first two months of this year. On the downside, it won’t likely be enough to offset both January and February’s losses. Additionally, barring fiscal stimulus from the Federal government (again, not going to happen in at least the near-term), the S&P usually bottoms for the year in the back half rather than Q1 when it starts the year off on such bad footing.
To us, this all fits with the current environment. The Fed meeting in a couple of weeks can give some much-needed clarity on the scope and pace of its impending rate hikes, potentially offering US large caps some reprieve this March. At the same time, markets will continue to negotiate the Fed’s monetary policy decisions for the rest of this year, and now also the Russia-Ukraine conflict for the foreseeable future. How both impact economic growth and US corporate earnings power could further dampen investor confidence and push off the bottom for US large caps to later in the year.