Our “Strong January Playbook”, or historical analysis of what happens after the S&P 500 has outsized gains in January, continues to work each month of 2019 almost to a T. Abnormally strong January returns – like this year – have been a historically clear signal about market direction over the balance of the year. Here’s an update of our analysis on how it’s worked so far this year:
- January: The S&P 500 rose by 7.9% during January 2019, one standard deviation above this month’s average return of 1.2% since 1958 (first full year of data).
There’s only been 8 other Januaries that have also returned +1 standard deviation above the average, or 15% of the time: 1961 (+6.3%), 1967 (+7.8%), 1975 (+12.3%), 1976 (+11.8%), 1985 (+7.4%), 1987 (+13.2%), 1989 (+7.1%), and 1997 (6.1%).
- February – July: On average, the S&P was higher most of the time every month from February through July after an especially robust January return. This year was no different as you can see in the chart following this piece. The only exception was in May when the S&P fell 6.6% due to trade concerns, but it rebounded by 6.9% in June and was also up 1.3% in July.
- August: The S&P has experienced negative returns most of the time in August during these special “Strong January” years, down an average of 50 basis points. In keeping with the trend, the S&P dropped 1.8% this past August.
- September: The S&P performed better-than-expected in September. The average historical return in “Strong January years” during this month is negative 0.1%, with the S&P lower +60% of the time. This past September, the S&P defied this trend with a +1.7% return.
- October: The S&P also outperformed last month, up 2.0%. The average historical return in “Strong January” years for October is negative 2.5% and the S&P was down +60% of the time. However, excluding the stock market crash in October 1987, it was up an average of 22 basis points. So while this month’s return bests the average, it is directionally in line when excluding the outlier year of 1987.
- November: With just a few trading sessions left, the S&P is up 3.2% this month. That’s higher than the historical average of 1.3%, but comes as no surprise given that the index was higher 75% of the time during “Strong January” years.
- December: Looking ahead, the average historical return for the last month of the year based on years with especially large January returns is +2.8%. The S&P was also higher 88% of the time during this month. The worst return was -1.2% in 1975 and the strongest was +7.3% in 1987.
As for the year as a whole, here’s how the S&P has performed overall during years with abnormally strong January returns:
- Every “strong January” year except 1987 saw positive double digit annual total returns for the S&P: 1961 (+26.6%), 1967 (+23.8%), 1975 (+37.0%), 1976 (+23.8%), 1985 (+31.2%), 1987 (+5.8%), 1989 (+31.5%), 1997 (+33.1%). The S&P was even up in 1987, albeit by single digits.
The average total return for these years is 26.6%. This year, the S&P is up 25% YTD.
- The earliest month when the S&P reached its high for the year was in mid-July 1975, followed by late August in 1987.
The rest of years peaked in September or the fourth quarter. The S&P reached its highest level in September during 1967 and 1976. It also hit its high in early October during 1989, and peaked in December in 1961, 1985 and 1997.
- Given such big annual returns during years that start off with a strong first month performance, we also looked at how the S&P does in the subsequent year. On average, the S&P rallied 10% during the following year, and was up +60% of the time. The best return was +28.3% in 1998, and the worst return was -8.8% in 1962.
The upshot: we expect further gains in December like our “Strong January” playbook suggests. With the S&P up 25% YTD and the “Strong January” December average of +2.8%, the S&P could end the year around the “Strong January” annual average return of 27%. President Trump will want a robust holiday shopping season, so we doubt he will throw a wrench into the mix in the coming weeks relative to trade and China. The Federal Reserve will also not want a repeat of the market meltdown that occurred in December 2018, so we expect the central bank to continue their current dovish messaging.
Even with such a large annual gain this year, history shows the S&P can continue to rally next year, just likely by not as much.