The Next Seventeen

April 11, 2022

By Michael Kayes, CFA Charterholder

When I was a young boy learning how to play golf, my dad gave me a tip that guided me through my high school and college career. During a tournament round in which he was my caddie, he watched silently as I triple-bogeyed the first hole. Walking to the next tee, he said, “It doesn’t matter what you did on the first hole, it matters what you do on the next seventeen.” How true that turned out to be.

I was reminded of that lesson watching the stock market fall not only in the first month of the year, but in the second also. I thought it was time to pull out The Yearbook – the 2021 SBBI Yearbook to be precise. Produced by Roger G. Ibbotson and Duff & Phelps, this annual publication provides U.S. Capital Markets performance by asset class going back as far as 1926. In short, it is akin to the bible for investment professionals.

Following the data… Since 1926 there have been 19 years (out of 96) where the stock market has dropped in January and February. In essence, it happens about 20% of the time, historically.

Those years were:

1928, 1935, 1948, 1953, 1957, 1969, 1973, 1974, 1977, 1978, 1982, 1984, 2000, 2002, 2003, 2008, 2009, 2016, and 2020. (Data is for large cap stocks)

Even more interesting (perhaps just to me), in 10 out of those 19 occurrences the stock market ended the year higher with the average annual gain equal to 21.7%. Rather impressive given the first two months produced negative returns. In the 9 years in which the stock market closed down, the average was -15.2%.

Based on the data, the first two-month correction in stocks could be the precursor to a powerful rally at some point later this year. Or it could be a harbinger of a particularly difficult year for the overall stock market. That’s not really much help, is it? And that, like my dad’s golf advice, is the point that investors should consider, in my opinion. There is a lot of work yet to be done this year that will ultimately determine investment returns for 2022, for both the equity and fixed income markets.

Potential positive catalysts for the equity market

  1. A drop in inflation due to a recovery in the logistical challenges coming out of the pandemic.
  2. A drop in inflation due to effective and timely Fed monetary policy.
  3. A combination of continued strong earnings and more attractive valuations.
  4. Divided government after the interim election.
  5. De-escalation of the conflict in Ukraine.


Potential negative catalysts for the equity market

  1. An escalation in geopolitical tensions in Ukraine.
  2. An escalation in geopolitical issues in and around China.
  3. Change of leadership in the White House.
  4. The Fed raises interest rates too quickly and causes a recession.
  5. The Fed raises interest rates too slowly and inflation worsens.

These are some of the most important issues we are currently monitoring. There are likely to be others as the year unfolds. In my opinion, there isn’t much value in attempting to assign probability to any of these potential catalysts, positive or negative. They are just too unpredictable. Despite that, I do believe earnings should continue to advance at a reasonable rate. I also expect divided government will be the likely result of the interim election. At the same time, I have very little confidence in the Fed executing effective and timely monetary policy. Their track record is not impressive. Unfortunately, I also have very little confidence that the current administration has the diplomatic skill to diffuse the situation in Ukraine. I hope I am wrong.

Therefore, it makes sense to me to approach the next tee, so to speak, with the following mindset. First, 2022 is likely to be a volatile year, with geopolitical events and erratic Fed monetary policy causing corrections as well as rallies. Second, it will be critical to nail company fundamentals and have an accurate assessment of valuation ranges for individual stocks. Third, it will require patience and discipline to take advantage of market opportunities.

The first two months do not a year make. But it is perhaps, time to focus on the task at hand, while disregarding insignificant soundbites, and avoid overreacting to short-term setbacks.

There are a lot of holes left to play. In the meantime, it might make sense to pray for wisdom and moral strength for our world leaders, and also lift up those in harm’s way today and in the future.

Michael Kayes, CFA Charterholder

Source: Ibbotson, Roger G.  2021 SBBI Yearbook. Hoboken, NJ. John Wiley & Sons, Inc. 2021

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