Why the Snake-Bitten Market Might Turn Around by September

For investors, equities’ performance this year has been enervating. After a four-month pasting, the stock market crept cautiously into May yesterday with a small 0.57% advance for the S&P 500, and this morning was ahead by a measly 0.1%.

Still, history gives us some solace, indicating that a nasty rout to begin the year won’t necessarily mean a lousy time ahead.

To be sure, there’s also precedent for continued mayhem in the wake of a punk first four months, says Sam Stovall, CFRA’s chief investment strategist. After all, the 10 worst January-April showings since 1928 led to the S&P 500 turning positive in May only 30% of the time, and showed a full-year gain just 20% of the time. Volatility lately is up, at 32 on the CBOE Volatility Index.

The recent first-four-month decline is the worst since 1945, says Stovall. Fear of the Federal Reserve’s tightening campaign (the Fed’s policymaking body announces its latest rate increase tomorrow), rampant inflation, supply snafus, the Ukraine war, and the pandemic are all obstacles to good performance.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Right now, of course, we are in a correction, defined as a 10% drop from peak, with the index down 12.8% this year. April is usually a good month, up an average 1.4% yearly since 1928, according to Yardeni Research. That ties December, and is exceeded only by July (1.6%). Historically, May is no great shakes: down 0.1%, tying February, with September the worst at minus 1.0%.

But Stovall notes that 23 corrections have occurred since World War II, dipping an average 14% and requiring four months to fall from peak to trough. He calculates that the current downdraft has averaged 14%. Historically, following the 14% slide, the S&P 500 has needed an average of only four months to retrace what it lost during the correction.

If that’s the case, then the market should return to its recent prominence by September.

An increasing number of corporations have had a pleasant surprise this year. Company pension plans, seen as liabilities ever since the Great Recession, are starting to report surpluses on their investment returns, according to reports from Milliman and JP Morgan.

“Thirty-six of the 85 Milliman 100 companies with calendar-year fiscal years reported surplus funded status at year-end 2021, compared with 15 companies in 2020, 13 in 2019, 12 in 2018, eight in 2016, nine in 2015, eight in 2014, and 18 in 2013,” states the Milliman Corporate Pension Funding Study, which surveys the 100 largest corporate pension funds in the United States.

Over the past two decades, the number of corporate pension plans has decreased by 73%, according to the Department of Labor. The primary reason for this was the funds’ poor performance combined with high liabilities toward retirees. But now, corporate defined benefit plans are at their highest rate of funding since 2007. The ten-year compound surplus return figure is also now positive, according to JP Morgan’s 2022 corporate pension peer analysis.

“Essentially, it shows up as a benefit for plan sponsors to carry these plans on their books. And we haven’t seen that since 2002,” says Zorast Wadia, principal and consulting actuary at Milliman and co-author of their pension study.

For more stories like this, sign up for the CIO Alert newsletter. 

Jared Gross, the head of institutional portfolio strategy at JP Morgan and co-author of the JP Morgan analysis, says that a surplus opens up a lot of options for companies.

“At minimum, the excess capital is a cushion against pension volatility,” says Gross. “It might even incentivize some plan sponsors to reopen plans that have been closed or unfreeze some plans that were frozen,” he says. “But I’m not expecting a lot of that, to be frank. I think some of that is a done deal.”