History shows the S&P 500 is still set up for gains this year despite sharp spikes in volatility and predictions of more pain to come

  • The S&P 500’s gain this year has been hard-won through volatile sessions, with daily moves of at least 1% in nearly half of 2023’s trading days. 
  • Bespoke Investment Group said data suggest the index could finish 2023 with a win. 
  • Four of five highly volatile years have ended with yearly gains for the broad index.

It’s been a volatile year for stocks so far – and at least one investor has placed big bets on volatility spiking – but history indicates the rocky road for equities could eventually lead to the S&P 500 logging a gain by year’s end, according to market research firm Bespoke Investment Group. 

The S&P 500 notched its 35th trading day of 2023 on Wednesday, and nearly half of those sessions have recorded daily moves of at least 1%. Other years carrying such volatility were 1988, 2003, 2008, 2009 and 2016.

Bespoke said the S&P 500 finished four of the five volatile years higher, gaining 12% in 1998, 26% in 2003, 23% in 2009 and 9.5% in 2016. 

The only exception was 2008, when the Great Financial Crisis hit. The S&P 500 started the year off with a decline of 8.5% in the first 35 trading days of the year and then sank additional 32.7% for the rest of the year, said Bespoke.

For now, the rally at the start of the new year has been showing signs of wear, including its worst session of 2023 earlier this week. The index was weaker in mid-February than where it started the month, though it’s still up more than 4% for 2023.

The Cboe Volatility Index, known as Wall Street’s fear index, has charged up nearly 11% over the past week. It’s slightly above 20, breaching the level that usually signals stable market periods.

From high-profile investors such as Michael Burry to financial powerhouses such as Morgan Stanley, warnings are coming in that stocks are in for a slide in the coming months or sooner than that. Bank of America projected all of the S&P 500’s gains for the year will be erased by early March. Among the major factors behind the warnings are even higher interest rates coming from the Federal Reserve as its remains in inflation-fighting mode to deterioration in corporate profit margins. 

“February hasn’t been a fun month so far, but when you consider the fact that the 10-year yield is up over 40 basis points month to date, it could have been a lot worse than a 2% decline for the S&P 500 and a decline of less than 1% for the Nasdaq,” Bespoke said. 

Yearly chart of daily 1% moves in the S&P 500 in the first 35 trading days

Bespoke Investment Group