After coming off strong gains in 2021 and a much welcome “Santa Clause Rally” in late December, the markets appear to have hit a wall in 2022. For some investors, the performance of the first 5 trading days of the year has been a good predictor of how the rest of the year may fare.

Since 1900, when the S&P500 provided a positive return within the first 5 trading days, the full year’s return averaged +12.3%. The historical odds of a positive return have also been impressive at 71%. This compares to an average return of only +1.1% when the market was down in the first 5 trading days. Unfortunately, the historical odds of a positive return in this scenario is a near coin flip at 51%.

The first five trading days in 2022 saw the S&P500 dip nearly 2%. At the time of this writing, the market continues to struggle to find its footing as it grapples with concerns around Omicron, inflation, supply chain disruptions, interest rate increases, quantitative tightening, and the uncertainty of the US mid-term elections. Under this backdrop, those investors who subscribe to this 5 Day Indicator would understandably be tempted to throw in the towel.

That being said, our friends over at Fundstrat Research, took a deeper dive into the data. In their study, they divided all the data between economic expansion years and economic recession years. What they found was that the 5 Day Indicator loses its meaning when the economy was expanding. Regardless of whether the first five days were positive or negative, both scenarios provided an average full-year return of +13.5% (see chart below). Parsing through the yearly data, in the last 10 instances where the S&P500 was down in the first 5 days within an expanding economy, all 10 instances provided positive returns. The most recent example was in 2016 when the market fell -6% in the first 5 days only to finish the year up +9.5%.

Our team finds tracking historical market data helpful, however, statistics alone can be misleading. Rather, data can be reorganized to provide new insights. As shown above, the key determinant of market returns seems to be more driven by the fundamentals and the state of the economy that businesses are operating in. As such, clients and investors should have a good grasp of which indicators of economic and corporate health should be tracked. We recommend you work with your advisor to understand what part of the economic and investment cycle we are in and to develop a “recessionary scorecard” to help track whether the state of the economy is nearing a fundamental shift. Despite a rocky start to 2022, we should remind ourselves that the year is still young.