SPX Could Face Headwinds During First Half of 2022

Seasonality is more of a concern than the SPX's last three years of gains

Senior Quantitative Analyst
Jan 5, 2022 at 8:00 AM
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The S&P 500 (SPX) has seen 29%, 16%, and 25% returns over the past three years, respectively. This week, I will look at whether double-digit returns are sustainable for yet another year. In addition, the next 12 months will mark the second year of U.S. President Joe Biden’s term, which may be a cause for concern during the first half of 2022.

Are investors pushing their luck? 

The table below shows that the SPX gained around 9.5% on average since 1950. It also shows the yearly returns since 1986 and 2002. After a year in which the S&P 500 gained 10% or more, the next year yielded an average of 9.15%, with 74% of returns positive. The performance after double-digit years is nearly identical to typical years.

There has been, however, slightly less volatility after double-digit years. The standard deviation of yearly returns goes from about 16.5% in all years, down to about 13% in years after 10%+ gains. 

The SPX has only had three other streaks since 1950 of three consecutive double-digit years. In these cases, the index gained an average of 12.6%, with two of three returns positive. These numbers don’t seem very concerning.


The next table shows the individual years after the SPX gained 10% or more three years in a row. The index gained double digits in two of those years. During the tech boom of the late 1990s, the SPX doubled during the three years heading into 1998. The index then went on to add another 27%.

The last time this occurred, stocks ran out of steam a bit, with the SPX flat in 2015. The data shows that even though stocks have gained an impressive 88% over the past three years, it does not mean potential for upside is lacking. The last few columns show the SPX was positive in the first quarter, as well as the first half of these years every time.


Presidential Cycles

When it comes to presidential cycles, third-year outperformance for the SPX is common. What is not often talked about is the underperformance during a president’s second year in office.

The average return for the second year has been about 6%, while the fourth year has the next worst return at 7.3%. In addition, just 56% of the returns have been positive in the second year of the cycle. The next worst performer by this metric is the first year, which has been positive 63% of the time. When the second year is positive, though, it averages the highest return at just below 20%.


The second-year underperformance isn't nearly as stark as third-year outperformance, so that could be the reason it gets overlooked. It’s notable that all the downside in the second year of the cycle has occurred in the first half of the year. Broken down this way, the next six months have historically been awful. Seasonality, if this is something you would like to consider, is much more of a concern than the fact we’ve had three superb years in a row.



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