S&P Annual Performance After a Big January

This is an update to a post that I first wrote last year, the last time that the S&P 500 had a big rise in the first month of the year.

When the S&P 500 has a good first month, it has statistically been followed by a really good year.  The index has risen by more than 4% in January 18 times in its 56 year history.  In those years it has averaged a 21.1% return for the full year, and it has been up double digits in every one of those years except for 1987 (which was a good year up until the October crash).

The S&P 500 has never been negative in a year with a big January, but it's worth noting that if a similar analysis is performed on the Dow, which has a 118 year history, there are five years (out of 28) that the index was up more than 4% in January and ended negative for the year.  Many of those years were significantly negative too: the average loss was 18.4% and the list includes 1914, 1929 and 1930.  The index ended those years down 30.7%, 17.2% and 33.8% after being up 5.1%, 5.8% and 7.5% in January respectively.

Weird eerie coincidence, the Dow has had a daily crash three times in its history: in 1914, 1929 and 1987.  All three years had big Januaries.

Number of Days Since Last 3% Down Day

2012 was a pretty mild year as far as volatility is concerned.  There were two periods of correction, but both were relatively light and there wasn't a single day that the S&P 500 was down 3% or more.

Markets have calmed down to the extent that it's actually been 448 days since the last time that the S&P 500 has fallen by 3% or more in a single day.  At today's level on the Dow that would be a 400 point decline.  For comparison, since 2008 we had grown accustomed to getting a decline that large once every 32 days on average.

Looking at S&P history since 1957, the current 448 day streak is better than average, but not quite at the best levels that the index has ever seen.  Over that period, a 3%+ daily decline happens about once every 217 days.  However there are several long periods without them. There was no such decline for 11 years between 1962-1973.  Even recently there wasn't a 3% decline for nearly 1500 days between 2003-2007. That streak was broken on February 27, 2007.

How Long Does the Average Bull Market Rally Last?

As of today, the bull market which began in March of 2009 is 1,422 calendar days old.  Over that whole period there have been nine drawdowns of greater than 5% which segment the bull market into ten periods of bull market rally.

The average bull market rally since 2009 has lasted 99 calendar days and has seen the market rise by 18.8%.  By contrast our current rally, which started in mid November, is just 75 days old and has charted a 10.9% rise.  If this rally were to last in line with the averages it would go on until February 22 and the S&P 500 would rise to 1608 before the next 5% pullback.  Below is a chart of the full bull market broken down by periods of rally and >5% drawdown.

Longest Interval Between Dow All Time Highs

Even though the Dow was down by 12 points today, it's beginning to look increasingly likely that we'll see a new all time high for the index in the not too distant future.  The previous all time high was at 14,164, just 281 points away from where the index closed today.  The index hit that mark in October 2007--a little over 5 years ago.  That's the 5th longest span in history that the Dow Jones Industrial Average has gone without making a new high.  After the depression it took 25 years to get back to its highest levels.

Years That the S&P 500 Never Went Negative

Last year the S&P 500 was positive for the entire year--it didn't close in the red YTD on any single day, and so far in 2013 the streak continues.  While there was little fanfare over the S&P 500's perfectly positive year, the occurrence was actually pretty rare.

Scanning data of the S&P 500 since 1957 produced only three other years that the index started the year positive and never closed negative on a YTD basis.  Below are the charts of those years: 1958, 1964, 1976 and 2012.  The returns in these years were 43%, 16%, 23% and 16% respectively.  An initial run of the data produced 12 years that were almost perfect, but 8 of those were lower on the first day of trading before heading higher for the rest of the year.

Economic Cycle and Dow Returns

Assuming that we don't run into a recession at the beginning of this year, 2013 will be the 5th year of economic expansion since recovery began in 2009.  How has the market done in the 5th year of other recoveries?

Below is the average return of the Dow Jones by year of past economic cycles.  Not surprisingly, the market tends to do the best in the first year of a recovery as securities prices and the economy slingshot back from depressed levels.  On average annual returns seem to follow a v shape pattern with the lowest rate of return coming in the 3rd year of recovery.  This is consistent with what we have seen so far in our most recent recovery.

The 5th year tends to be a good one, up 11.4%, and the 6th year tends to be decent, up 6.5%.  However only three of eleven post war expansions have made it through a 6th year.  By contrast, five have made it through a 5th year, although the breaking point tends to come in the third year--only six of eleven made it past that point.

Recession dates based on NBER data rounded and adjusted by Avondale

Can BAC Double Two Years in a Row?

Bank of America was up 108% last year to lead all members of the Dow.  Amazingly, one can argue that even after the 100% return, BAC is still cheap though.  The stock trades at a little over 0.5x book value, which is a steep discount to its peers.  Although fundamentals say that a double is not an absurd idea, would a back to back doubling have precedent?

At least in the last 13 years, the follow up performance of the previous year's best Dow stock (the "Champ" of the Dow) has not been good.  Since 1999 the defending Champ has been negative 10 out of 13 times in the following year.  Six of those times the Champ has been down by double digits and the average performance is -9.58%.  Below is the performance of the past Champs in the year that they won the title and the year they tried to defend it.  BAC shareholders beware.

Best First Days in Dow History

The averages are up around 2% to start 2013--for historical comparison the chart below shows the best first days in Dow history going back to 1900.  The Dow has only closed 2%+ higher on 9 occasions since then.  The first day of the year has been positive about 55% of the time, and the worst first day was in 1932 when the Dow was down 8.1%.

Admittedly, this analysis is a little silly.  The first day of the year has no empirical correlation to full year returns.

2012 Ends In Same Spot as 2006

At the beginning of last year I noted that our current bull market has paced the 2003-2007 bull market step for step and year for year.  After 2012 maintained the same pace as 2006, 2013 starts in almost the same position as 2007.  If the pattern holds for 2013, the index would be relatively flat for the year.  In 2007 the S&P 500 was up 3.5% for the full year; however, it was up as much as 9% before a late year selloff that ended up being the end of the bull market.

What Happens If Congress Refuses to Pass a Fiscal Cliff Deal?

I've recently heard a few people talk about how congress wouldn't fool around with a fiscal cliff vote because it learned its lesson after it failed to pass TARP, which caused the market to fall apart.  While it may be true that congress is still scared from 2008, it's not entirely true that securities markets fell apart after the first TARP vote failed.  In actuality neither the Lehman bankruptcy nor the failed TARP vote precipitated the bulk of 2008's equity market collapse.  Counter to the historical narrative, the real crash came after TARP was passed.

Lehman announced its bankruptcy on Sunday September 14th and the market was actually up slightly the following week on rumors of TARP.  When congress initially refused to pass TARP, the Dow did fall by 777 points on the day, but recovered more than half of those losses the next day.  In fact, the S&P 500 was down less than 10% from the beginning of September until TARP was passed.  

The market crash began in earnest the day that congress passed TARP.  Between that day, October 3rd, and the 2008 low on November 21, the S&P fell 36%.  After a 20% rally into December, it would continue falling until March of 2009.

Is [The] Santa Claus [Rally] Real?

The end of this week will bring the end of November, and with that there is the usual seasonal talk about a Santa Claus rally in the stock market.  The logic goes that stocks usually rally between Thanksgiving and Christmas, but much like with Kris Kringle himself, it's fair to ask the question: does the Santa Claus rally really exist?

Looking at the historical data, since 1957 December has been a positive month on average for equities.  In the past 5 years it has been especially good--powered by a nearly 11% gain in 2008 and 4% gain in 2010.  Below is the average path that the S&P 500 takes during December.  It demonstrates some Christmas magic may indeed exist--the path is even strangely sleigh like...

S&P 500 Historical Annual Performance vs. Dow

After today's selloff, the S&P 500 is up 7.8% for the year (ex-dividends) while the Dow is only up 2.9%.  This means that the S&P 500 is outperforming the Dow by 490 bps, which seems like a lot given that the indexes are both large cap indices.

Still if the indexes ended the year with this performance, it wouldn't be the largest historical spread between the two.  In 55 years of S&P 500 history, there have been 10 years that it has beaten the Dow by more than 5% (ex-dividends).  There are also 9 years that the Dow has beaten the S&P 500 by the same spread.

Makes you think--what's the point of benchmarking active managers if even similar benchmarks outperform one another from year to year?

Checking Back in on 2006 vs. 2012

Early this year (back on January 4th) I posted that 2009, 2010 and 2011 had followed the pace of the 2003, 2004, 2005 rally almost perfectly.  Since then we've been checking back in periodically to see how well 2012 has paced 2006.  The pattern has actually been eerily similar except for the fact that the pace of the rally that came off of the summer lows was slightly faster than in 2006 and reached a higher high.  The recent 5% pullback has corrected for that though, and now 2012 looks almost exactly like 2006 again.

S&P 500 After Obama 2008 Election

Even though November 2008 was a much different market environment than November 2012, it's worth noting that equity markets sold off pretty hard after Obama was elected in 2008 too.  The volatility surrounding the financial crisis was extreme, but leading up to the election the S&P 500 had found some footing rallying from 850 to 1000.  

Following the election the S&P lost 25% in 13 trading days.  On November 21 the S&P 500 made a near term bottom that would last until February 2009.  There was a big intra-day reversal when it was leaked that Tim Geithner would be Treasury secretary.  Four years later, as we wait to find out who his replacement will be, maybe that person could spark a rally of her/his own.