Having consecutive years of negative returns is pretty rare on Wall Street. After this year’s crash there is only a slim chance that the market will turn lower again in 2023. If it does, however, history shows that investors will have to prepare for another very unpleasant 12 months.
There is one simple takeaway from the 2022 seasonal milestones: it was a bad year stemming from a bear market. The S&P 500 peaked on the first day of trading of the year, and global stocks followed suit a day later. Given that backdrop, it’s no surprise that we now look back and see that negative seasonal adages seem prescient.
Since 1928, the S&P 500 Index has only fallen for two consecutive years on four occasions: the Great Depression, World War II, the oil crisis of the 1970s, and the bursting of the dot-com bubble earlier this century. .
“In all cases, it was a question of consequences without causation. After all, seasonality works often enough to keep the myths alive. If they failed repeatedly, they would no longer be in the global investing consciousness. People would not talk about them, ”says Jefferies in a recent note.
Long-term average returns would not purport to prove them. “But under the rug, all those averages are made up of times when they work and times when they don’t. Whether it is the effect of January, selling in May or September being the worst month, they all fail most of the time”, adds the analysis firm. Frustratingly, 2022 was simply the rare year where no seasonal adage seems to have failed, except for the Christmas rally.
From a purely statistical standpoint, the fourth quarter of 2022 earned a 6.1% recovery for the S&P 500, which I use as a proxy for “risk trends,” after three straight quarters of losses (the first of its kind since 2008).
However, in the year, the same index finally lost more than 20%. That’s the worst year since the Great Financial Crisis of 2008 and the third worst annual performance for the benchmark in 48 years. In the past century, the S&P 500 has only lost ground in this time period 30 times in the last 100 years.
Thus, there have only been four cases in that same period of time in which the markets had consecutive years of declines. The last one was from 2000 to 2002 with a bear market of three years and a fall of 40%. Excluding the Great Depression of the early 1930s, the following year in the markets after a loss of about 20% or more for the S&P 500 will leave a profit of 21%.
Statistics can offer valuable information, but such averages should not be construed as certainty of what is to come. Fundamental circumstances change over weeks, months, and years, traversing the normal layout of a calendar.
While back-to-back annual losses are historically, an unusual loss spread over part of the following year is much more common. This is important to remember as we head into 2023, considering that some of the biggest prevailing fundamental themes of the past year have not been resolved for bulls.
Painful inflation, trade levies, tighter financial conditions and recession concerns are among the top issues threatening continued pressure. As we move down the calendar, developments will eventually tip the balance on these major issues; But in the absence of overwhelming fundamental momentum, traders and investors need to take seasonal patterns into account.
Starting with the monthly snapshot it is important to get a broader picture of the market environment than is normally seen at the beginning of the year. Historically, the month of January has averaged a positive return of 0.9% for the month, but year-to-year behavior can differ markedly.
More useful for averaging conditions is the typical volume and volatility of the time frame. Volume has put in modestly from December to January based on month-end comparisons, but when averaging the months based on daily levels, January only has more positive data compared to the previous month.
However, on a configured per trading day basis, January is the second busiest month of trading in the calendar year. By comparison, volatility increases at the beginning of the year. Assessing volatility as the VIX average close daily for the month, the “fear index” has averaged 19.6 from 1990 to 2021. Activity to that extent accelerates in February and peaks for the year in March. Investors will be aware of all these variables.
