January Seasonality: Have Returns Pulled Forward?

George Smith | Portfolio Strategist

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Following on from November’s “Turkey Rally”, December defied weaker recent seasonality trends and delivered a present for investors in the form of outsized stock market returns.  Now as we move into January and the new year, investors are asking where does seasonality point to now for stocks, and have returns been “pulled forward” following a strong festive period? 

December continued the strong momentum that brought almost a 9% stock market gain in November (using the S&P 500 for reference), delivering a present for stock market investors in the form of an almost 5% gain (as of close on December 28). Assuming no collapse today, this will rank as the best December for stocks since 2010 and the 12th best December since 1950. Including the strong December we just experienced, the month is firmly back on the “nice” list with an average return over the past five years of 2% (up from a weaker 0.3% average as it stood coming into the month). The November and December two-month return of over 14% is the 12th-best two-month return since 1950 and the best since the same two months in 2020. 

Looking forward to January seasonals, it has historically been a positive but middle-of-the-road month, ranking 7th of all months over the last five years. The returns over the past 10 and 20 years, however, are almost flat, ranking 8th out of all months over those periods. 

December Back on the Nice List, January Seasonals Also Behaving 

S&P 500 Index Average Monthly Returns (1950–2023) 

Bar graph of S&P 500 Index average monthly returns from 1950 to 2023 depicting strong momentum for December the last five years as described above.

Source: LPL Research, FactSet, Bloomberg 12/28/23 (1950–current)
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. 
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.    

When looking at slightly longer seasonals, the January–February period tends to have weaker performance compared to other two-month return windows, ranking between 9th and 11th of all such two-month windows over the periods studied. Much of this is due to a weak February dragging down the two-month return, with February being the second-worst month (behind September) for stocks over the past 5- and 10-year periods as well as all years back to 1950. 

Seasonals Turn Weaker with January–February Two-Month Period 

S&P 500 Index Average Two-Month Returns (1950–2023) 

Bar graph of S&P 500 Index average two-month returns from 1950 to 2023 depicting weaker performance for January–February as described in preceding paragraph. 

Source: LPL Research, FactSet, Bloomberg 12/28/23 (1950–current)
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. 
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.

So, have positive stock market returns been “pulled forward” after the very strong months we just had?   When stocks gain more than 10% during the November–December period, January has historically been quite strong, with gains of 2.3% on average during the six times this has occurred. This is well above the average return for all Januaries since 1950 of around 1%. Looking at January’s that followed just a strong December (over 4% gain), however, gains average just 1%, with 11 of 15 occurrences ending in the green to start the new year.  

As we examined last month, following November’s outsized stock returns, stock market strength begets strength when it comes to the next 12 months following the strong monthly returns. The same study, but with two-month periods when stocks have risen more than 14%, looks equally promising for investors. Looking at all periods back to 1950, there have been just 12 occasions where the S&P 500 has gained over 14% in a two-month period. The average return a year afterwards is over 20%, well outpacing the return of around 9% for all periods that followed two-month periods where stocks returned less than 14%. Returns a year out from strong two-month returns have also been overwhelmingly positive, with the only negative yearly returns occurring in 1987–88, as a very strong January and February preceded the “Black Monday” stock market crash in autumn 1987. 

Strong Two-Month Returns Precede Strong Years on Average 

S&P 500 Index Annual Returns Segregated by Preceding Two-Month Return

 

Occurrences

 

S&P 500 Return Forward 1 Yr.

S&P 500 Two-Month Return >14%

12

Average Return

20.5%

 

 

Median Return

20.1%

 

 

% Positive

90.9%

S&P 500 Two-Month Return <14%

876

Average Return

8.8%

 

 

Median Return

10.0%

 

 

% Positive

73.4%

Source: LPL Research, FactSet 12/28/2023 (1950–Current)
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. 
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90. 

In summary, after an incredible November–December period for stock markets, overall stock market seasonals turn weaker in the new year, but stocks have historically performed well in the year following such outstanding periods of strength. We do however maintain our slight preference for fixed income over equities in our recommended tactical asset allocation, but this is more a function of fixed income valuations remaining relatively favorable over equities due to their still attractive yields, rather than equity weakness. Stabilizing inflation, the likely end of the rate hiking cycle, lower long-term interest rates, and lower energy prices continue to be positives for stocks, but increasingly stretched valuations, and contrarian signals of bullish sentiment and market positioning may become headwinds to much further near-term progress for stocks.  

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George Smith

George Smith chairs the Tactical Model Portfolio Committee, which manages LPL Financial’s multi-asset models across multiple managed account platforms.