There’s a bit of ancient Wall Street lore that says the first 5 trading days in January sets the tone for the year to come. CNBC wrote a whole article about it today (link below). According to the publishers of the Stock Trader’s Almanac when the first 5 trading days show a gain, the S&P is up 82% of the time for the whole year going back to 1950.
That got us to wondering: if the first week of trading is such a “tell”, how are other market measures faring so far in 2020? We hit the 5 day market with today’s close, so let’s take a look.
#1: Here is the YTD return data for a range of US equity indices:
- Dow Jones Industrial Average: +0.7%
- S&P 500: +0.7%
- S&P 500 Equal Weight: +0.1%
- S&P Mid Cap 400: -0.5%
- S&P Small Cap: -0.4%
- Russell 2000: -0.3%
Bottom line: 2020 has only kicked off with a bang in Large Caps – everything else is lower on the year.
#2: Now, let’s look overseas at returns in dollar terms:
- MSCI EAFE Index: +0.2%
- MSCI Europe: -0.1%
- MSCI Japan: +0.5%
- MSCI Emerging Markets: +0.4%
- MSCI Frontier Markets: -0.3%
Bottom line: aggregate (EAFE and EM) non-US markets are off to a generally good start, although not as strong as US large caps and Europe. If the “5-day rule” works offshore, this is a promising sign for the year.
#3: Next, here are the YTD returns for US Large Cap sectors, ordered by their percent weighting in the S&P 500:
- Technology (23%): +2.0%
- Health Care (14%): +0.5%
- Financials (13%): -0.2%
- Communications (11%): +2.7%
- Consumer Discretionary (10%): +0.8%
- Industrials (9%): +1.9%
- Consumer Staples (7%): -1.1%
- Energy (4%): -0.6%
- Utilities (3%): -1.2%
- Real Estate (3%): -1.0%
- Materials (3%): -3.0%
Bottom line: the entire reason the S&P 500 is up 69 basis points on the year – triggering the 5-day rule – comes down to Tech (46 bp contribution) and Communications (30bp). Google and Facebook dominate the latter sector, and both are up 5% YTD. In other words, 2020 is starting off as another strong year for Big Tech.
#4: Lastly, let’s look at fixed income returns using popular ETFs that invest in the space as a proxy:
- 3 – 7 Year Treasuries (IEI): +0.3%
- 7 – 10 Year Treasuries (IEF): +0.6%
- +20 Year Treasuries (TLT): +0.9%
- US Investment Grade Corporate Bonds (LQD): -0.2%
- US High Yield Corporate Bonds (HYG): +0.2%
- Non-US Investment Grade Bonds (BNDX): +0.2%
- Emerging Market Bonds (EMB): +0.1%
Bottom line: long dated (+20 year) Treasuries are beating equities in 2020. That’s a function of recent global events, of course, and should unwind if current bullish trends continue.
Pulling all these data points together, 3 things pop out:
#1: That concentration of US equity returns in Tech + Google/Facebook we mentioned. This is not new, but it is remarkable given that concerns over Big Tech regulation continue to grow. Early days, of course, but markets are signaling that 2020 will be clearer sailing for this group than previously thought.
#2: While the 5-day rule is technically about the S&P 500, the fact that US small caps (Russell 2000 and S&P 600) are down YTD is a troubling signal for this slice of US equity markets. We’ve noted in past reports that small cap valuations correlate with high yield spreads. Those are already tight and seem unlikely to improve much further. Therefore, the fact that small caps are down YTD is not a signal that the broader US equity market is in trouble.
#3: Stock markets look 6 months out in terms of daily/weekly price moves, which is why the first 5 days of January have any defensible signaling effect (rather than just being an oddball correlation). The generally positive tone for US/international equities so far in 2020 means markets expect earnings growth in the second half. Since this lines up with the easy comps of 2H 2019, that makes sense.