Strong Start Could Mean an Up Year

January and February both outpace average gains only about one-third of the time. When they do, the market usually ends the year higher

By Joseph Lisanti

The first two months of this year both saw gains in the S&P 500 that were above average. If history is a guide, that augurs well for stocks in 2004.

Over the last 76 years, stocks posted an average gain of 1.5% in the first month of the year and an average loss of 0.1% in the second month. This year the index rose 1.7% in January and 1.2% in February. The "500" has beaten its historical performance in both January and February on 24 previous occasions. In 21 of those periods, the market finished the full year higher. The three times it finished lower were the Depression years of 1930, 1931 and 1937.

When both January and February outpace the historical performance for those months, the full year tends to have outsized moves. In 23 of the 24 years, there was a double-digit percentage change for the year. In 16 of those years, the gain or loss was 20% or more. Only in 1987, when returns were penalized by the October crash, did the "500" experience a single-digit percentage move, a gain of only 2%.

The average annual gain in the 24 years that January and February were stronger than typical was 14.9%. Of course, averages can mask huge variances. The biggest gain, a surge of 45%, came in 1954. In contrast, the 47.1% loss in 1931 remains the largest one-year decline in the history of the S&P 500.

Assuming the average gain for a year in which the first two months were strong, the S&P 500 would end 2004 at about 1278. But that may be a bit aggressive. Standard & Poor's is maintaining a yearend target of 1230 for the S&P 500 index. And we do expect some bumps along the road to higher stock prices.

We advise 50% of investment assets in U.S. stocks, 15% in foreign equities, 10% in bonds and 25% in cash and short-term instruments.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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