Indicator of the Week: What the First 50 Days Mean for Stocks

This week I'm beating all those "First 100 Days" articles to the punch by looking at the first 50 trading days of 2017. The chart below shows the average S&P 500 Index (SPX) returns throughout the year, during the current rally (2010 through 2016), and then more generally over the past 50 years. This year, stocks have gotten off to a faster-than-usual start. I'll look at other years that started off in the same fashion, to see if similar price action has tended to be good news or bad news going forward. Finally, there has been quite a difference between the year-to-date performance of small-cap vs. big-cap stocks. Again, I will search the historical record to see what that could mean for the stock market going forward.

Similar Years for the SPX

Looking at the S&P since 1928 (as far back as we have data), I found the other years whose day-by-day stock path most resembled this year so far through mid-March. The year that was most similar was 1995. If that's any indication for the rest of the year, that is excellent news. The S&P 500 gained 34% in 1995, with a 25% gain from mid-March through the end of the year. The chart below shows a few other years that resembled this year thus far. Two of the four years (1995 and 1945) were up huge over the rest of the year, and the other two years listed (1972 and 1964) weren't too shabby, either.

Below is a table with the years most like 2017. They are ordered by their rank on how closely that year's chart matches this year's chart. As I mentioned, 1995 was the most parallel year, and that was a great year for stocks. Years that resemble this year so far have tended to do very well. From mid-March on, the similar years averaged a gain of over 12%, with 89% of the returns positive. Typically, the S&P gains 5.77%, on average, from mid-March to the end of the year, with 67% of the returns positive. 

Small-Caps vs. Big-Caps

We have Russell 2000 Index (RUT) data since 1979. Going back to then, this is the fourth-worst year so far for the small-cap index when compared to the big-cap S&P 500 Index. Below are the years where RUT relative strength to the SPX was the lowest. I bolded the years that are similar to this year, in that the S&P had a pretty decent year-to-date gain, but the relative strength of the Russell 2000 was below 0.98.

If the current environment seems very similar to the late 1990s, there is a reason for that. The comparable returns I highlighted above are simply the years 1995 through 1999, with the exception of 1996. Looking at their rest-of-year returns, that's good news; the S&P 500 Index boasted a double-digit percentage gain in each of those years. Plus, the Russell 2000 was up at least 20% in three of those four years, with one bad year where the index lost almost 10%.