First Quarter Effect in Stocks

Earlier this year, we researched a so-called January Effect on the stock market. In that article, we found evidence that there is a stronger correlation between positive market returns in January and positive 12 month returns, than when returns are negative in January preluding negative 12 month returns.

In a recent article on seekingalpha.com, Tiger Technologies ventured to find whether there is a relationship between first quarter returns (returns in the first three months of a year) and full year returns, or whether there is a First Quarter Effect. The company’s conclusions confirmed such a relationship, and observed that it is quite similar to the January Effect.

Tiger Technologies took the quarterly and annual returns of the S&P 500 index over the period 1952-2013 and ran a correlation analysis of first quarter returns and the returns for the rest of the year. They found that the first quarter had the highest correlation (15%) among all quarters to the performance of the sum of the remaining three quarters (from -5% to 13%).

They looked deeper and studied the direction and size of those returns and found that 39% of the studied years (23 years) had negative first quarter returns. Out of those 23 years, only 10 years, or 43%, saw full year results negative as well. This resembles the evidence about the January Effect: a negative start of the year does not necessarily indicate that the rest of the year will also be negative.

As to positive first quarters, first quarter returns were in the black in 36 out of 59 years. In 33 years (92% of 36), the full year stock market return was also positive. In other words, a positive first quarter has 92% of the time led to a positive full year return.

Tiger Technologies used this analysis to forecast the S&P 500 index result for 2014. In Q1/2014, the S&P 500 index grew by 1.7%. The company’s analysis showed that a positive first quarter has led to a positive year 92% of the time and a first quarter growth of 1%-2% has led to a positive year 100% of the time (although there were only three such years between 1952-2013, see the table).

This sounds quite good in terms of S&P 500 chances to have a positive return in 2014. At the same time, we would like to warn those who may want to quantify what the S&P 500 return would be for the whole year 2014 based on this analysis. The average return for S&P 500 in those three years was 14.2%. However this number cannot be used to gauge this year’s performance because, in particular, the data, which was used for this study, is limited. And we have to cite our usual caveat in this kind of situations: past performance is no guarantee of future returns.

Michael Zienchuk, MBA, CIM

Investment Advisor, Credential Securities Inc.

Manager, Wealth Strategies Group, Ukrainian Credit Union Limited

416-763-5575 x204   mzienchuk@ukrainiancu.com     www.ukrainiancu.com

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