What the S&P's Fast Start to 2019 Could Mean for Stocks

This stock market signal sounded before Black Monday, too

Senior Quantitative Analyst
Feb 27, 2019 at 7:30 AM
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Stocks have gotten off to a fast start this year. The last time the S&P 500 Index (SPX) was up this much before the end of February was 1987, which is otherwise known as the year of Black Monday. Do fast starts like this tend to be vulnerable to sharp pullbacks? This week, I’m looking back at other instances where stocks shot higher throughout the first two months of the year to find out how the market behaved going forward.

S&P Soars at Least 10% in Two Months

Going back to 1950, this is just the fifth time the S&P 500 was up double digits at the end of February (assuming we don’t pull back too much over the next couple of days). In the short term, there’s nothing to be afraid of based on the data below. Specifically, March was up at least 2% in each of the four previous instances. Six months later (at the end of August), the index remained higher every time.

spx returns through february

The table below summarizes the returns above. For comparison, the table below that summarizes the data for all years since 1950.  I already mentioned March being positive every time. The tables below show that after a strong start to the year, March averages a gain of just over 2.5%, which is more than twice the typical March returns since 1950.

There’s strong outperformance for up to six months, though it’s just four data points. For the rest of the year, the S&P was up three of four times with an average return that underperforms anytime returns. The one down year was 1987, which is the year of Black Monday (referring to Oct. 19, 1987, when the S&P 500 fell 20% in one day).

sp500 returns through feb

Sizing Up This Year's Stock Returns

Here’s one more way I looked at it. I like to look at years that have similar chart paths to the current year. Using my method, below are the four years that look most like 2019. Eyeballing the chart, two of the years (1997 and 2012) saw significant pullbacks before mid-year. The index even fell below breakeven in April 1997 after the fast start. Each of the four years, however, is higher by the end of the year.

Iotw SPX Up 10 Chart 3

The table below summarizes the returns going forward in those four similar years listed above. Looking at these returns, the short-term returns are only slightly better than the anytime returns. The longer-term returns (six months and rest-of-year) were positive all four times with the average return that outperformed typical returns. Based on the studies above, it doesn’t seem strong starts to the year become especially vulnerable to pullbacks.

Iotw SPX Up 10 Chart 4


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