What Strong YTD Returns Mean for March/Q2

Earlier this month we published a piece on how the S&P 500 performs during the rest of Q1 after its return is over one standard deviation above its average performance for January. We want to update this analysis today because thus far in 2019 US equities have been following the historical playbook. Here’s a quick reprise of the work to remind you of how the S&P performs during March of those years before we look ahead to Q2:

• The S&P 500 rallied 7.9% this past January compared to the average of just 1.2% for all the Januaries since 1958 (first full year of data).
• The standard deviation of returns is 5.0% for January over this time frame. We looked at the years when it had a return that was one standard deviation higher than the average of 1.2%. The benchmark here is 6.2%.
• There have been nine years when the S&P 500 has returned 6.2% or higher during January, or just 15% of the time over the last six decades. The eight aside from this year are: 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%).
• The average return during these nine years was 8.9% in January. For the following February, the S&P was higher +75% of the time and gained 1.4% on average. The highest return was 6.0% in February 1975 and the lowest was -2.9% in February 1989.
  
  In March of these years (save 2019), the S&P 500 was higher 75% of the time with an average return of 1.5%. The highest return was +3.9% in March 1967 and the lowest was -4.3% in March 1997.
• The S&P 500 finished higher in Q1 during all eight years when January returned greater than one standard deviation above the average. The average Q1 return was +12.1%, with +21.6% as the high mark in 1975 and +2.2% as the low mark in 1997.

With the S&P up 3.0% this February, it bested the average of 1.4% for that month after such a large move in January. Point one for February and if history is any guide, the S&P should be up in March as well for the reasons outlined. Looking towards Q2, we also calculated how the S&P performed the following three months during these same years with strong Januaries. Here’s what we found:

• During the eight years when the S&P returned over one standard deviation above the average (except 2019) in the first month of the year, the S&P was up an average of 2.2% in April. It was also positive in +60% of those years. The high was +5.8% in 1997 and the low was -1.2% in 1987.
• The S&P was up an average of 1.9% in May and positive 75% of the time. The high was +5.9% in 1997 and the low was -5.2% in 1967. As for the latter year, that print wiped out most of the gains it had in April (up 4.2%) and June (up 1.8%); Q2 ended up just 49 basis points.
• In June, the S&P was up an average of 2.1% and also positive 75% of the time. The high was +4.8% in 1987 and the low was -2.9% in 1961. For the latter year, it ended the quarter down 0.7% as it only returned +0.4% and +1.9% in April and May, which got erased in the last month of that Q2.
• The S&P was up an average of 6.3% during the second quarter as a whole. It was only lower once out of those eight years in Q2 1961, down 65 basis points. The high mark was +16.9% in 1997.

Bottom line: this analysis points to further upside the rest of this quarter and next. Should the US and China finally reach a trade agreement this coming month or even in Q2, that should also brighten the earnings outlook for the back half of the year as it gives businesses the clarity they need for more capital investment. We understand the pitfalls of this analysis in that history does not always repeat itself. So far, the trend is our friend, but we will keep monitoring it.