Thursday, March 2, 2023
As a rough February for the markets draws to a close, with a 2.3% decline in the S&P 500 Index, we look at what clues seasonality data may give us for stock market performance over the coming months. Turns out that while, historically, March has been a pretty strong month for stocks, in recent years, seasonality trends have seen weaker average returns, before bouncing back with a stronger April.
Based on seasonals it was perhaps no surprise that stocks struggled in February. Looking at average returns by month, dating back to 1950, February is one of only two months (along with September) to post average declines. Over the most recent history of the last 5 and 10 years, February has posted the worst or second worst monthly returns, and the two month period of January to February has been the worst such period over the past 10 and 20 years.
Historically, March has been a strong month for average returns, in the top four or five months, but in the past 5 years it has slipped to be the third worst. In fact, the February to March period has been the worst two month period over the past 5 years. More encouraging is the March to April two month period that has been the second strongest (behind only November to December) over all periods dating back to 1950, and over the past 20 years it has been the strongest two month period. Over more recent periods the weaker March returns have been a drag before a strong April. April has consistently been the second or third strongest month over all the time periods studied. In recent years, May and June have historically been weaker months prior to a blockbuster July.
Taking a look at this from a slightly different angle, March has been the fourth strongest month as measured by the percentage of positive S&P 500 Index monthly returns (going back to 1950). Although this data has been weakening in recent years, a solid 60% of March monthly returns have been positive over the past 5, 10 and 20 year periods. April is the second best month since 1950, as measured by this statistic, and has been strengthening in recent years. Last April’s negative return (-10.8%) was the first negative April in 10 years and only the second in the prior 17 years.
As we highlighted in prior to the midterm election last year, a favorable historic longer term trend for stocks is looking at returns a year after the midterm election. Since 1950, stocks have had a positive return one year after the midterm election every single time, with an impressive average of almost 15%. So far, since the midterm election, stocks returns are positive, just by 0.5%, but there is still a long way to go to November.
Another positive sign from the current stage of the presidential cycle is that we have moved into the stage where historic trends have been a tailwind for stocks. Under new presidents, markets historically struggled in the second year coming into the midterms, as they did last year, before seeing strong returns in the second half of the presidential cycle. In data going back to 1950, year three of a new president’s term has seen the best annual returns of the periods studied—posting an average gain of over 20%.
In summary, the immediate seasonal picture for March is mixed, but longer term data around the stage of the presidential cycle is more positive, as are the strong returns that April often brings. We maintain a positive but cautious view on equities, as markets could remain volatile as the Federal Reserve tries to break the back of inflation without a deep and/or prolonged recession. Such a recession is not our base case and we see a return to a lower volatility environment as likely, but investors will probably have to wait until later this year for clarity on the ultimate destination of interest rates. Meanwhile, prolonged debt-ceiling debates may cause flare-ups in volatility.
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