Where Can the S&P 500, Volume and Volatility Go In the First Week and Month of 2023?

S&P 500, VIX Volatility Index, Volume and Seasonality Talking Points:

The Market Perspective: S&P 500 Range Between 4,100 and 3,600; Bearish S&P 500 Below 3,500
The S&P 500 absorbed an approximate -20 percent loss in 2022, the worst year’s performance for the index since 2008
While there are unresolved fundamental matters that continue to represent a burden to sentiment heading into 2023, there is also favorable analysis – such as seasonality norms

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We have brought to a close the 2022 trading year and are now heading into 2023. As is often expected in the final bout of liquidity in most trading years, speculative appetite lost traction through the final weeks of December. From a purely statistical standpoint, the fourth quarter of 2023 registered a 6.1 percent recovery for the S&P 500 – which I use as a stand in for ‘risk trends’ – following three consecutive quarters of loss (the first such stretch since 2008). However, on the year, the same index ultimately lost -20 percent. That is the worst year since the Great Financial Crisis in 2008 and the third worst yearly performance for the benchmark in 48 years. In the past century, the S&P 500 has only lost ground on this time frame 30 out of the 100 years. There have only been four instances in that same time frame where the markets realized consecutive years in the read – the last being the 2000 to 2002 three-year and -40 percent slide. Excluding the Great Depression of the early 1930s, the year following a -20 percent or greater loss from the S&P 500 averaged a 21 percent gain.

Chart of S&P 500 on Logarithmic Scale with 1-Year Rate of Change (Yearly)

Chart Created on Tradingview Platform

Statistics can offer valuable insight, but such averages should not be construed as certainty of what lies ahead. Fundamental circumstances change over the span of weeks, months and years, cutting across the normal layout of a calendar. While back-to-back yearly losses are unusual historically, an extension of losses through a portion of the subsequent year is much more common. That is important to remember as we head into 2023 considering that some of the most important, prevailing fundamental themes of the previous year have not resolved in support of the bulls. Painful inflation, trade encumbrances, tighter financial conditions and recession concerns are among the top themes threatening continued pressure. As we move into the near year, developments will eventually nudge the scales on these prime themes; but in the absence of an overwhelming fundamental urge, traders and investors should keep in mind seasonal averages.

Chart of S&P 500 Emini Futures with Volume and Overlaid with VIX Volatility Index (Daily)

Chart Created on Tradingview Platform

Starting on a monthly basis, it’s important to gain a bigger picture of the market environment that we typically see at the start of the year. Historically, the month of January has averaged a 0.9 percent gain over the month, but the year-to-year performance can differ drastically. More useful to me when averaging out conditions is the volume and volatility typical of the time frame. Volume has increased modestly from December to January according to month-end comparisons, but averaging out the months according to daily levels, January is only modestly higher compared to the previous month. On a trading day adjusted basis, however, January is the second thinnest month of turnover of the calendar year. In comparison, volatility picks up to start the year. Assessing volatility as the average close of the VIX on a daily basis through the month, the ‘fear index’ has averaged 19.6 from 1990 to 2021. Activity on that measure accelerates into February and peaks for the year in March.

Chart of Average S&P 500 Performance, Volume and Volatility by Month from 1990 to Present (Monthly)