DALLAS.SKYLINE.CREATIVE.COMMONS

Here’s what happened the last 8 times the S&P 500 lost more than -5% in January since 1950

Jan-5pc and SP500
Data source: Ycharts.

 

In an environment of such “unusual uncertainty” with confounding data, let’s step back and take the analytical viewpoint of a physician if, for no other reason, than to try something different. Below, I show every January since 1950 that ended with a loss greater than -5.0% and show how the S&P 500 performed for the rest of the year.

Bad Januarys  

Over the past 66 years, there have been eight January’s with a loss of -5.0% or greater, which is a prevalence of about 12%.  Five of these eight January’s resulted in losses for the year, and the average yearly loss among these eight January’s was -5.6%.

 

There have been two other years where the S&P 500 also fell exactly -5.1% as it did in January 2016, and the returns in those years were -11.5% in 1977 and -10.1% in 2000. However, it might be worth noting that “this time is different” because we have had confounding effects from QE, prolonged low interest rates, and even several major central banks running negative interest rates, which has never happened before.

 

To be sure, this is a small sample size, the stock market is not a “patient”, and I think these data are more of an intellectual curiosity fit for a stock almanac than a reason to adjust allocations. However if these data are to be taken at face value, then 5 yearly losses out of the 8 Januarys is about a 63% “positive predictive value” as a physician might say when characterizing a screening test. That is, the probability of having a yearly loss given a January loss of greater than -5% may be about 63%. It’s also worth mentioning that we’ve never experienced monetary policy “tachyphylaxis” (i.e. a diminishing drug effect with repeated administration), so we really are in uncharted territory.

 

Let’s look at another set of data also starting around 1950, the ratio of Net Worth to Personal Disposable Income:

Net Worth to Income  

The Tech Bubble in 1999 and the Housing Bubble in 2007 can easily be seen.  If, in the future, it turns out that we are in a bubble today, I will leave it up to the reader to come up with a creative name for it.  But the “Unusual Uncertainty” we’re experiencing these days is all the more reason for investors to be more prudent in their stock picking and in their allocations.

 

One thing is a little more certain: For those data-driven investors like us who practice a more risk-focused strategy within the alternative asset class space, the curiosity alone of adding one more data point at the completion of this year will be interesting to witness for this rare-ish January phenomenon.

 

Physician Capital Partners is a low-fee, autonomous, liquid-alternative robo-advisor offering high-performance, quantitative hedge fund strategies designed to protect and grow capital regardless of +/- GDP and +/- inflation. For family offices, institutions, and individual investors who want an alternative asset with value, dynamic algorithms, and low equity correlation.

 
Dr. Phillip Guerra and Charles Sizemore CFA
Physician Capital Partners
10440 N. Central Expressway #800
Dallas, Texas 75240

Leave a Reply

Your email address will not be published. Required fields are marked *