We’re now looking down the barrel of February. And what do we see in the historical record? A lot of red. It’s the only month besides September that reliably finishes with a negative sign in front of its result.
Bespoke data shows that, over the last 100 years, the Dow has averaged a decline of 0.08% in the month of February, with positive returns only 52% of the time. Over the last 20 years, the average February return has been -0.17%.
But don’t despair, as there is a wrinkle that you need to know about: February tends to turn out much different than average when January has been super-strong.
In the S&P 500’s history going back to 1927, there have been 25 years in which the index has gained more than 4% in January. The benchmark index has averaged a gain of 1.10% in Februarys following Januarys that saw gains of more than 4%, and the S&P 500 has been positive in February of these years 64% of the time.
The remainder of the year has historically been positive as well when January has been up big. Following 4%+ moves in January, the S&P 500 has gained an average of 6.90% (median 11.78%) over the remainder of the year with positive returns 76% of the time, according to the Bespoke data.
Better yet, going back to 1950, there have been 18 years in which January has seen a gain of more than 4%, and the S&P 500 has been higher for the rest of the year in 17 of these years for an average gain of 15.14%.
So that’s the good news — but it’s not the whole story. Last year started out exactly the same way with a super-strong January that was followed by a super-strong February of +4.1%. But then the market sold off from April through summer. The S&P 500 did eventually finish with a gain of 8.7% from February to December, but the main message is that it was a battle.
History never repeats exactly, of course. If it did, as Warren Buffett once said, then all the librarians would be billionaires. But it still makes sense to be aware of the tendencies, and at this juncture the point to be aware of is that an improvement in sentiment and a good start in returns can be contagious. All things being equal, the underlying positive trends of modest economic growth combined with cost-cutting and restructuring that bolstered success in January should remain in play for as much as the next 12 months.