Records, Risk, and Return

The equity market action over the past year is truly historic on many levels. It is important to recognize how unique this time frame has been and that a more volatile 2018 may be likely, and quite frankly normal. This week we will highlight some of the amazing streaks that have taken place, list a few of the reasons why we should anticipate a pickup in volatility, and explain how any possible weakness can provide suitable investors with an opportunity in diversified portfolios.

How Rare Have Things Been?

Below are five S&P 500 Index observations to illustrate just how unique the recent market activity has been:

1. The year 2017 was the first in history that the S&P 500 closed higher on a total return basis (including dividends) all 12 months of a calendar year. Should the S&P 500 close higher in January (up 7.2% as of January 26, 2018), this would be a record 15 consecutive months higher on a total return basis. The previous record (since 1950) was 11 consecutive months set twice during the 1950s, most recently in 1958–59.*

2. The index has officially gone 400 trading days without a 5% correction, which is the longest stretch in history. A week ago today the index broke the previous record of 394 trading days set during the mid-1990s. As Figure 1 shows, the current streak started right after the Brexit vote in the United Kingdom in June 2016 and is now more than 18 months old. It is worth noting that previous long streaks took place during bull markets, but once the streaks ended the bull markets continued for some time.

3. The S&P 500 was positive year to date every single day last year, marking 1 of only 10 years since 1950 to accomplish that feat. In fact, the index hasn’t been negative year to date since late June 2016, now the fifth longest streak ever without a negative year-to-date day.

4. Incredibly, the S&P 500 hasn’t posted a 1% drop in 112 trading days, tying the longest streak since 1985. This is all the more amazing considering there was a 109-day streak that ended in March 2017. In other words, two of the four longest streaks without a 1% drop over the past 50 years took place within the past 15 months.

5. January is picking up right where 2017 left off, as the S&P 500 is up approximately 7% for the month. This would be the best January to start a year since 1989. It doesn’t end there though, as the S&P 500 has closed at a new high 14 times so far this month—the most ever during the month of January and the most for any month since June 1955.

Though good starts to a year can be a positive sign, that doesn’t mean the ride will be smooth. For example, since 1950, when the month of January finishes up 5% or more, the remaining 11 months have been higher 11 of the past 12 times; but during those years, the average intra-year maximum drawdown (peak-to-trough decline) has been 10.7%. In other words, this strong January for stocks could signal a continuation of the bull market but also more potential volatility as well.

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