In our last blog, we raised our attention to some technical indicators that in the past have anticipated small corrections. We also indicated that in our opinion, barring any major externality or policy mistake, such a correction should be a tradeable one from the long side.
In support of such a projection, this week we are going to review some historical data based on year to date performance. Historically, stock market action in the beginning of the year has some correlation to the rest of the year performance. Indeed, the market index generally moves in the same direction of the first sixty days of trading approximately 60% of the times (source: WSJ).
So far in 2019, the S&P 500 has increased by over 10%, one of the largest rallies in the first two months of the year in decades.
Other notables (10% or above) January and February rallies include:
- 1991: up 11.2% in the first two months and then an additional 13.6% for the rest of the year
- 1976: up 10.5% in January and February and then 7.8% more
- 1975: up 19% in the first 60 days to be followed by another 10.5% appreciation
- 1943: up 12.6% first 60 days and then up 6.1% the remaining 10 months.
In two instances the correlation did not work. In 1987, the S&P 500 registered a 17.4% rally, but then it corrected 13.1% for the rest of the year (including a gut wrenching negative 20% in one day on Black Monday). In 1931 things also did not work out that well; the market went up 16.9% first but then it collapsed over 50%.
How it is going to play out this year of course is anybody’s guess; however, trade negotiations and monetary policy will play a huge part in pushing the market in the right direction.
Recent commentary from the Fed seems to play in sync with a more benign scenario for the rest of the year. However, as far as the trade spat with China, the outcome is much more difficult to predict. Even though it would be in the interest of everyone to find incrementally positive agreements, the strategic and long-term nature of the issue makes it difficult to base any forecast on pure economic rational.
One thing we feel might be in the cards for sure is a more volatile environment across most asset classes.