To say its been a dismal start to the year for equities, both domestically and around the world, is an understatement. In fact, the 4.93% decline by the S&P 500 is the single worst start to the year after four trading days ever going back to 1929. Since 1929, the S&P 500 has traded at least 4% off the previous year’s closing price after four days of trading just two times, in 1991 and in 2000. But before anyone jumps to conclusions, its important to remember that just because the year starts off weak it doesn’t necessarily mean the rest of the year will be weak. For example, the outcomes that resulted by the end of the year were very different in 1991 and 2000. The S&P 500 rallied 32.2% from the fifth trading day to the end of the year in 1991. In 2000, the S&P 500 fell a further 5.9% from the fifth trading day to the end of the year.
The overall median return of the S&P 500 after four trading days is 0.68% (the average is 0.67%). The best return occurred in 1938 as the market rallied 8.2% in just four days. The worst returns as we noted above occurred in 1991 and 2002, as the market fell in both circumstances by 4.48%. When the market starts the year in positive territory, the median return for the rest of the year is an impressive 11.7% (average is 9.28%). However, within this data set there is a wide distribution of returns. The best year occurred in 1954 as the S&P 500 finished the year 43.6% higher after the fourth trading day (the market finished the fourth trading day up just 1%). The worst year occurred in 1931 as the S&P 500 plunged 49.5% after starting the year off up 4.9%. Overall since 1929, when the market ends the fourth trading day higher than the previous year-end level, the market ends the year higher 73% of the time (40 out 55 times).
When the S&P 500 ends the fourth trading day in negative territory, the median return for the rest of the year is -1.4% (average is +1.2%). Again, there is a wide distribution of returns among these 32 data points as well. The best year was in 1991 when the S&P 500 rallied 32.2% after the S&P started the year down 4.48%. The worst year occurred in 2008 as the market slumped 36.2% after falling -3.6% to start off the year. Overall since 1929, when the market ends the fourth trading day lower than the previous year-end level, the market ends the remainder of the year higher 47% of the time (15 out of 32). So while the median return is obviously much better in years when the S&P 500 stars the year higher and it seems investors have a better change of positive yearly returns in this circumstance as well, the scatter plot below clearly suggests that this is by no means a one for one relationship. Good years can easily turn bad like in the case of 1931, 1937, 2002, 1941, and 1940 to name a few. While bad years can just as easily turn out to be great years for investors such as in 1955, 1982 and 1991.
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Lastly, since we know the S&P 500 has started the year off as poorly as it ever has, what has happened the rest of the year each time the S&P has started off this poorly? We will define a poor start to the year as ending the fourth trading day down at least 2% since the previous year-end level. We have had nine years that meet this criteria. The median rest of the year return in this situation is -5.9% (average is 1.5%). However once again we have a wide range of returns. As the table below shows, four of the nine years had positive rest of the year returns and three of those four years the market rallied by at least 18%. On the other side, five out the nine times we had negative returns and in four of those years the market fell somewhere between 5.9% and 9.4% for the rest of the year.
So what’s the main takeaway here after going through all of this data? That all types of returns, from extremely positive to a full on bear market, are in play for the remainder of the year (helpful, right?). However, it does seem that the probability that 2016 ends higher is lower than it would have been if the year had gotten off to a better start. Odds seem stacked against a relatively mundane “flat” year as well and it would seem that the most likely outcome for the remainder of the year is for either positive or negative double-digit returns. Check back on 1/1/2017.