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Friday, April 1, 2022

After the S&P 500’s worst quarter since 2020, stocks are heading into what has historically been one of the best months for generating returns.

Whether that holds this year, however, depends on how traders weigh a string of risks to the outlook.

The good news is that the track record for April has been astonishingly strong. Since 1950, the fourth month of the year has been the best month for stocks on average, according to an analysis from LPL Financial’s Ryan Detrick.

More recently, the S&P 500 has been green in April in 15 of the past 16 years, with an average return of 3.1% (the high was a 12.7% return in April 2020, and the low was a -0.7% dip in April 2012).

One caveat to this trend has been that in midterm years (like 2022), April has ranked the seventh best month for the S&P 500 with an only slightly positive return. But this year, Detrick isn’t too concerned.

“My base case ... is I think we made a potentially pretty significant low in March. I wouldn’t be shocked at all if April continued the upward trajectory,” Detrick said in a podcast earlier this week.

The S&P 500 closed as low as 4,170.70 this year on March 8, dropping 13% from the index’s recent record closing high of 4,796.56 from Jan. 3. As of Thursday’s close, the S&P 500 was back at 4,530.41, jumping 8.6% from its March low and bringing the index back to just under 6% below its January high.

But for some strategists, it’s because of this already very strong gain that stocks may have less room left to run in the near-term. And that’s especially the case as geopolitical risks remain a critical point of uncertainty for investors.

The S&P 500 “likely has further to run over the next 10 days only if there is an almost-immediate resolution to the Russia-Ukraine crisis,” DataTrek Research co-founder Nicholas Colas wrote in a note Thursday.

To further illustrate the extent of the recent run-up, Colas noted that the S&P 500 had already risen sharply since March 7 — the day when the CBOE Volatility Index (^VIX), or “fear gauge,” spiked to 36. That 36 level is significant because it’s two standard deviations from the index’s long-run average and thus, to DataTrek, a contrarian “buy” signal for investors looking to buy into dips. Since 1990, the S&P 500 has usually only returned an average of 2.5% in the month after the VIX reached 36. But so far since March 7, the S&P 500 has already risen 7.8%.

Other strategists have also struck a more cautious tone on stocks in the near-term, even heading into a seasonally strong month.

“We're a little bit skeptical of the rally that we've seen so far,” Stuart Kaiser, UBS head of equity derivatives research, told Yahoo Finance Live on Thursday. “We've been fairly cautious year to date, simply because of the inflation and growth mix as well as the Fed shifting policy. And then, obviously, you layer on top of that the Ukraine situation.”

“It's been a very sharp rally, but it's happened on relatively low volumes,” he added. “And the read on positioning of institutional investors is that it's still pretty light. So it does seem like a rally that hasn't been supported by a wide range of people. “

And responding to a question of what could undo stocks’ rally heading into April, Kaiser offered two key risks: Oil prices and the Federal Reserve.

“A quick move higher in the price of oil would be probably the number one risk,” Kaiser said. “And then I think a close second would be the market pricing how many total rate hikes we're going to get from the Fed. There's a narrative here that if we get 50 basis points in May, that's just pulling forward and your total number of hikes is going to be about the same. But if we were to start pricing, I think, additional hikes in the future, that would be a secondary consideration.”

And, on top of all these factors, April will also mark the start of first-quarter earnings reporting season, which many on Wall Street believe will show the slowest growth rate for corporate profits since the fourth quarter of 2020 (though encouragingly, estimates have been creeping higher throughout the quarter).

So ultimately, we’ll see whether seasonal strength wins out against this year’s uncertain geopolitical and economic backdrop.

By Emily McCormick, a reporter for Yahoo Finance. Follow her on Twitter

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