Three Monster Years for the S&P 500 Set a Towering Bar for January

To all the record highs, the months without a correction and every other death-defying feat the stock market has pulled off, add another superlative. The S&P 500 Index has now doubled since New Year’s 2018, capping a stretch of sustained strength with few precedents.

Using monthly closes, you have to go back decades to find another period when the index’s three-year total return exceeded 100%. Two decades, to be exact, to the bursting of the internet bubble. And while nothing in that comparison is basis for panic in any rigorous statistical sense, it at least shows the dauntlessness of the current rally and the challenge investors face in deciding if it’s sustainable.

To wonder is normal. Doubts creep in when superlatives pile up. A third straight year of double-digit returns for the S&P 500. Seventy record highs in 2021 alone. The best December since 2010, pushing the index to 26 times earnings. In the past five sessions, the gauge added 0.9%, another up week in a year when positive closes made up 63% of the total.

“December’s gain could be January’s pain,” said Mike Bailey, director of research at FBB Capital Partners. “If investors are topping off their winners in December, that might dilute the January effect,” he said. Pressures early on in 2022 may include more hawkish commentary from the Federal Reserve, inflation-constricted fourth-quarter earnings reports, and valuations that are near five-year peaks.

History shows that may be the case. Following an annual return of greater than 20%, the S&P 500 tends to start out the year tepidly. That’s the case for data going back to 1980, with Januaries that follow blockbuster years coming in flat on average. And that performance is worse than the average January return of 1.2% over the last eight decades, according to Jessica Rabe, co-founder of DataTrek Research.