The beating taken by the market in the first 5 trading days of the year is not a sign of things to come and stocks will still see a positive return in 2022, Fundstrat says
- The first five trading days of 2022 were negative for the stock market, with some taking it as a sign of things to come for the year.
- But analysis from Fundstrat suggests that the stock market will do just fine in 2022.
- "Since 1982, many 'down 1st 5 days' ended up as great years for markets," Fundstrat's Tom Lee said.
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The stock market's first five trading days of 2022 were negative, with the S&P 500 falling 2.5% and the Nasdaq 100 down about 5.5%.
That's historically been viewed as a bad "omen" for the stock market, according to a Monday note from Fundstrat's Tom Lee. Since 1900, according to the note, a positive return in the first five trading days of the year led to a median full-year return of 12.3%. Meanwhile, a negative return in the first five trading days led to a median full-year return of just 1.1%.
But this analysis is misleading, according to Lee, who dug further into the data and found that analyzing bull market years led to a very different conclusion.
Dividing the data set into years when the economy was either expanding or in a recession, Lee found that the first five trading days of the year gave no signal as to whether stocks would finish the year higher or lower.
In a year of economic growth, a positive stock market return in the first five trading days of the year led to a median full-year return of 13.5%. Meanwhile, a negative return in the first five trading days led to the same median full-year return of 13.5%.
"There is no difference. In fact, as the chart below highlights, the differential comes from 'bear market/recession' periods," Lee explained.
And further zeroing in on data since 1982 shows that a negative return in the first five trading days of the year still led to strong returns for the stock market by year-end, with some years seeing gains of nearly 30%.
With economic growth expected to continue in 2022, according to estimates from various Wall Street firms, Lee's research is timely, especially for bullish investors.
"The 'first 5 days' doesn't mean anything. We still expect 2022 to be an up double-digit kind of year," Lee concluded. Lee has set a 2022 year-end S&P 500 price target of 5,100, representing potential upside of 10% from current levels.