At the end of 2020, the S&P is on pace to land at a year’s overall return of 17.63% in a year that started with normal numbers, saw a crash when COVID-19 came into our lives and disrupted every aspect, and then a massive surge as lawmakers and economists alike worked to minimalize the economic damage that the pandemic had the potential to bring.
With businesses and cities shut down periodically and many Americans steadily without work or underemployed, making sense of these number became increasingly important. If we look toward the almost 100-year history of the S&P, we see that this fluctuation was not anything foreign. We evaluated the January and February following a year where the S&P 500 marked a return of 10% or higher and the results told an interesting story.
Since the S&P’s inception in 1926, there have been 55 years with a return of 10% or greater. The S&P’s average return is right around 10%.
Of these 55 years, 32 times the following January had positive returns. 22 times it did not. Also, 12 times January saw returns of above 5%. Only 3 times it saw returns above 10%.
February similarly saw 32 times where they followed the 10%+ return year with a positive return and 22 times where it didn’t. This same February has seen 4 times over 5% and has never been above 10% returns.
As the graph shows below, more often than not, the following two months after a 10% return or higher were significantly lower than that year return. In fact, the January or February (after a year of 10% or greater returns) never topped the year that preceded it in its respective return.
One of the most important things to note, is that in an abnormally higher return year, where the S&P beats its average of around 10%, doesn’t necessarily bring a down year in the following 365 days. In fact, 25 times a year of 10%+ returns was followed by another 10%+ return year.
Another thing that stands out: when the S&P had a year of 10% returns or above, and the following January had a positive return, the year that followed had a decent chance of a return of above 10%. This happened 22 times out of 32 positive January returns. Additionally, looking at the February that accompanied the aforementioned January, if this February had positive returns, then the following year was another 10%+ return year, 20 out of 32 times.
It is most important to note that with the everchanging circumstances we find ourselves in, the companies and overall economy that the S&P denotes is growing and adapting in new ways that it may not always properly account for.
But we can find importance in the past, what the S&P was built on and how it still operates in a very similar way. Many of those who made laws and built our economic system the way it is have done so for most of the S&P’s life. This is to say that the way it functions as a means of understanding the U.S. market’s well-being has not changed, but the climate and modern scenarios of life have. As always, past returns are not indicative of future returns.
