Friday, January 6, 2023
Investors have gladly hit the reset button after last year’s downhill ride on the S&P 500. What started with a champagne record high on the first trading day of 2022, fizzled out into a volatile bear market by June and nearly a 20% decline by year-end, marking the fourth worst year for the index since 1950.
Given the degree of last year’s decline and abnormal path of price action, including a single record high on the first trading day of the year, we analyzed correlation data to find years that most closely resemble 2022. More specifically, we calculated the daily return progression of the S&P 500 for every year going back to 1950 and then ran a correlation analysis comparing each year to 2022. The bar chart below provides a breakdown of each year’s correlation to 2022.
As you may notice in the chart above, very few years have a high correlation to 2022, which makes sense considering the average annual price return for the S&P 500 is 9.1% during this time frame. The year 1962 stands out with the highest correlation at 0.82, along with a few other years that have a relatively high correlation coefficient. The table below provides a deeper breakdown of these years, including how the market performed over the following year.
In order to provide historical context beyond correlation coefficients, we included some additional macro insights for each year above. A few key highlights:
- The highest correlation years to 2022 generally have higher annual returns over the following year.
- Of the 11 years observed above, seven included a recession, which spilled over into the following year during six of the seven periods.
- Of the 4 years without a recession, there were no recessions recorded over the following year.
- Annual price returns over the next year for all periods highlighted above averaged 11.7%, with only two years generating negative returns.
In terms of analogs to 2022, 1962 checks the box as the closest comparison based on the data above (highest correlation coefficient, higher trajectory of federal funds rate, and no recession occurring within the year). The chart below compares the price of the S&P 500 during 1962 and 2022. We also included the 1963 period for the S&P 500 along with its price return progression during the year to project a hypothetical path for the S&P 500 in 2023. Under this scenario, the S&P 500 would finish the year at 4,565 (+18.9% off the December 31 close).
Of course, this projection and correlation data comes with the major asterisk of correlation does not imply causation. And while history may not repeat or imply causation, it often rhymes, which would be welcomed by investors for 2023. Subsequent S&P 500 annual returns for years that closest correlate to 2022 tend to be above average and positive. History also suggests high correlation years that do not include a recession typically avoid one over the following year.
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