After such a volatile trading session and with the S&P 500 down 10.0 percent year-to-date, today we want to reprise our work on how US equities tend to perform during poor returning years. We have three points on this topic:
#1: History shows down Januarys (like this year), on average, correlate to subpar returns for BOTH the next month (February) and rest of a given year. As a baseline, the S&P declined 5.3 pct last month compared to the average of +1.2 pct in January, marking the 4th worst return for that month in the last +40 years.
- February: When the S&P has been down in January (average -3.5 pct when that’s the case) since 1980, it has declined by 1.1 pct on average in February, or slightly worse than the average of -0.1 pct.
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) and up in February just under half (47 pct) of the time (up an average of 2.5 pct).
The S&P is down 5.0 pct this month through today’s close, with just two trading days left.
- Year: When the S&P is down in January (which only happens 40 pct of the time), it tends to produce a lower annual return compared to 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.
The S&P is down 10.0 pct year to date.
Takeaway: The S&P is following the playbook of what happens after a down January by carrying that negative momentum into a tough February. That tends to be the case more so than the index seeing some snapback this month.
#2: If you think the S&P 500 will end 2022 in negative territory, know that the index has not bottomed until at least June when that has happened since 1958 (first full year of data). The S&P has been down on a total return basis in a fifth of years over the last +6 decades. During those 13 years:
- The index troughed in June once, September twice, October four times, November twice and December four times.
- The S&P had an average total annual return of -12.7 pct, and it was down an average of 23.3 pct through the low of those years. The range spanned from -12.1 pct in 2018 to -48.8 pct in 2008.
Takeaway (1): When the S&P has produced a negative total annual return in the last +6 decades, it has bottomed in the back half of the year all but one time. Put another way, it troughed for the year in Q4 three-fourths (77 pct) of the time and never in the first five months of the year.
Takeaway (2): down years for the S&P usually bottom in the solid double digits. February 23rd marks this year’s low so far, when the S&P was down 11.3 pct.
#3: If you think the S&P will be able to squeeze out a mediocre positive return this year (+0-5 pct), know that this outcome is rare and the index doesn’t usually bottom until at least Q2.
- The S&P has posted a modest positive total return (+0-5 percent) in only 6 years (average of 2.3 pct) over the last +6 decades versus an average total return of +12.2 pct.
- During these years, the S&P bottomed in April twice, May once, August once and October twice.
- On average, the S&P was down 11.9 pct when it hit its intra-year bottom, and it rebounded 13.8 pct on average from the low through year-end.
Takeaway (1): The S&P has only bottomed for the year between Q2 and Q4 when it ends the year up less than 5 pct.
Takeaway (2): 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 low was -11.3 pct or close to the average (-11.9 pct) for the 6 years with gains of +0-5 pct. That said, the annual low does not usually come until at least April.
Bottom line: whether you think the S&P will be down or up modestly this year, history says there’s likely more pain to come as the soonest it’s hit its intra-year low in these scenarios is April. With this math in mind and still so much uncertainty about both Federal Reserve policy and the Russia-Ukraine conflict, 2022’s nadir for US equities is likely still to come.