The Shape Of Things To Come?
The first month of 2022 is now in the books, and to call it an inauspicious beginning to the year might be an understatement. There seem to be some definite headwinds for the United States, and the economy, which the market is reflecting.
The Federal Reserve stood by the policy telegraphed last year, to curb inflation by winding down stimulus measures and likely raising the federal funds rate.1 There is also “war and rumors of war”, to steal a phrase from the Good Book, with Russia massing troops on the border of Ukraine2 and China continues to cause tensions in regard to Taiwan3. In the domestic markets we saw enthusiasm for buying waning. In the major US market indices, the S&P 500 Index saw a Total Return of -5.17%, the NASDAQ Composite Total Return was -8.96%, and the Russell 2000 Total Return was -9.63% for the month. Perhaps, if we were to look for a silver lining, we might say “at least we finished the month off the lows and not down double digits”, but that is rather weak consolation. The slow start to the year reminded us of the stock market saying which goes something to the effect of “As goes January, so goes the year”. Looking for the origin of this quote we find this saying is attributed to Yale Hirsch, of The Stock Trader’s Almanac, which is akin to the Farmer’s Almanac, but for equity markets.
As a way of examining this adage that the year will be “more of the same” after January, we thought to look at the data. The table below displays the returns for the S&P 500 Total Return Index over the last 25 years (previous 24 years plus this year for reference). As we can quickly see, this January was the 3rd worst of the last 25 years on a total return basis, but we can also easily see that a negative return for the year is almost as likely to happen after a positive first month (as evinced in 2018, and 2001) as when January begins the year in negative territory. Something else that is easily observable is that the previous 24 years were split exactly evenly with 12 positive, and 12 negative January returns (with an average return that is almost exactly zero as well), but this year tips the scale and makes 13 negative vs 12 positive. Looking next at the annual returns for the previous 24 years we see only 5 years in which the return was negative (2000-2002, 2008, and 2018), with an average return of over 10% for the last 24 years. So, whether the saying held true in the past, it certainly hasn’t been the case for the last quarter of a century.
(Chart Source: Stadion; Data Source: Bloomberg Terminal)
Rob Dailey
Portfolio Management Analyst
1https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126a.htm
Published January 26, 2022; Accessed February 4, 2022.
2https://news.yahoo.com/russian-troops-mass-belarus-ukraine-152019738.html
Published January 29, 2022; Accessed February 4, 2022.
3https://www.npr.org/2022/01/31/1076895963/tensions-between-china-and-taiwan-are-the-highesttheyve-been-in-decades
Published January 31, 2022; Accessed February 4, 2022.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
The S&P 500 Total Return Index is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index. As a total return index, it assumes reinvestment of all cash distributions.
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