The stock market is crushing the first quarter. What that may hold for the rest of 2024.

By William Watts

Similar strong starts have tended to lead to 'frightful yet fulfilling' full-year performances: CFRA's Stovall

It's the final week of the first quarter and the S&P 500 is on track for a price gain of nearly 10% - and has rallied nearly 30% off its Oct. 27 closing low - leaving investors to ponder just how much good news is already baked into the market.

Indeed, as MarketWatch's Joy Wiltermuth reported this weekend, the scope of the rally has investors and strategists worrying over warning flags and pondering steps they can take to protect themselves in the event of what many see as a potentially overdue pullback.

The market's year-to-date performance "would seem to indicate a lot could be priced in. We checked back to 1970, and there have only been 9 1Qs with better performance," wrote analysts at Jefferies, in a weekend note.

That alone might understandably make investors nervous about chasing the rally, but Jefferies observed that such strong starts often indicate a rally can continue - at least for a while.

Through Friday's close, the S&P 500 SPX was up 9.7% for the year to date, while the Dow Jones Industrial Average DJIA had rallied 4.7% and the Nasdaq Composite COMP had advanced 9.4%.

Citing data going back to 1970, Jefferies found that the S&P 500 posted an average first-quarter gain of 2.5%. When the index does better than that, the second quarter tends to beat its average gain of around 2.6% by 60 basis points, or 0.6 percentage points. Also, the S&P 500 tends to be up around 69% of the time in that scenario, versus an average of around 64%.

And when the S&P 500 returns more than 10% in the first quarter, the boost to the next three months is even bigger, they said, with the second quarter averaging a gain of 3.3% and rising 78% of the time.

There is, of course, a rub.

While the second quarter tends to see further outperformance after a strong start to the year, performance in the second half tends to take a hit (see table above), Jefferies found, with the third quarter seeing a fall of 1% versus a "flattish" average performance otherwise. Fourth-quarter performance, meanwhile, has come in just 8 basis points above its long-term average in years that see a strong first-quarter performance.

"So while we certainly run the risk of pricing too much positivity into stocks with such a massive rally to start the year, we might not have to take our medicine until later in the year," the Jefferies analysts wrote.

Sam Stovall, chief investment strategist at CFRA, ran the tape all the way back to 1945. He found the S&P 500 on track for its 12th strongest first-quarter performance since the end of World War II (see table below).

The longer-term data sounds the same theme, strong first quarters tend to be followed by stronger-than-typical second-quarter performances. And they also point to strong full-year gains.

Be aware, however, that the ride may also be bumpier than usual, Stovall said.

He noted that of the 15 top first-quarter advances, 13 saw declines of 5% or more, with the average pullback coming in at 11.1%. And eight of those 13 pullbacks were followed by second declines that averaged 12.6%, he said, with nearly two out of three of the follow-up fallouts proving deeper than the initial selloff.

From a volatility standpoint, the top 15 first-quarter advances saw the average number of days with price swings of 1% or more at 43, roughly the same as for all years since World War II. The top five first-quarter years, however, saw an average of 70 days with price swings of 1% or more, while the top 10 sported an average of 53, Stovall said.

Still, 14 of the 15 top first-quarter years ended up with double-digit full-year price gains, averaging close to 23%, Stovall said. Only 1987 saw a low-single-digit annual advance.

"So, in other words, this strong start implies a frightful yet fulfilling full-year performance for the S&P 500," Stovall said.

-William Watts

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03-25-24 1003ET

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