S&P 500 Mythology 👽

by 8 Jan, 2019

Believe it or not, every New Year serious investors shake off their holiday excesses and start to look for signals about what the year ahead has in store. Many of these punters believe that the S&P500’s performance in the first five days of the year accurately reflects whether the bulls will roam free or the bears will rule the market for the remainder of the year.

So, does this theory have any backing or is it just an urban myth?

The theory goes that when the S&P 500 racks up a gain of 2% or more in the first five days then the year will end up in the green. However, should the magical 2% not be reached, then a sea of red is forecast to wash over the markets.

This may all sound a bit airy fairy at first glance. However, the theory is backed by some rather compelling numbers dating back to the 1800s. 69% of years that saw a rise in the first five days ended with a positive return, while 31% ended in the red after a positive first 5 days. Similarly, 58% of years that started in the red, ended in the red, and 42% that started with a loss ended in a gain.

So, as you can see there is definitely a basis for the theory. However, even though the stock market loves dredging up these old wives tales year after year, you cannot base your investment decisions on them. We wish it was that simple, but it’s not.

At the end of the day, 2019 will come down to the fundamental health of the global economy and the events that politicians decide to throw into the mix. The S&P 500 shed over 10% in 2018, and has recouped just over 3.21% since the start of the new year. Today is the fifth and final day, and it seems like the magic number may be reached, but will it be enough to counter the weaker global conditions?

The S&P 500’s first quarter performance will ultimately be determined by a few key factors. The Fed’s approach to monetary policy, the US-China trade war and the partial US government shutdown.

So far, Jerome Powell has alluded to a flexible approach to monetary policy in 2019 which has brought some much-needed confidence back into equities. Monetary tightening was responsible for the contraction in global growth that pulled markets down from October towards the end of 2018. A softer tone will give companies some breathing room to recover from the sharp sell-off and hopefully regain some of the lost ground.

With trade talks already underway, the world will be watching closely for signs of a possible deal. The trade war has had global consequences affecting every nation in some way or another, shattering investor confidence in China and emerging markets. A solid trade deal will bring renewed energy into emerging markets in particular, but also give a comprehensive boost to global investor confidence…which is desperately needed!

The partial government shutdown has turned from a short-term inconvenience to a growing political risk for the US as President Trump continues to threaten a prolonged shutdown over his border wall funding. For now this stand-off has had a limited effect on the US economy, but the longer it drags on, the more serious it gets. Even though the president has downgraded his demands from a concrete barrier to a steel one, the potential for a serious game of brinkmanship is growing, and the effects could be worse than anticipated

So whether you want to believe in myths or your own intuitions, we’re sure we can all agree that the first quarter of 2019 is going to be a hum-dinger!

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