The S&P 500 has started 2026 positively, gaining nearly 2% in the first week. This early rise comes after concerns about high valuations and potential bubbles at the end of 2025.
Historical data spanning three decades shows a correlation of approximately 0.42 between January performance and full-year returns for the index. This indicates a moderately positive relationship, not a strong predictive link.
A table of performance levels reveals patterns. When January declined more than 5%, the average annual return was -7.01% across five occurrences. When January rose more than 5%, the average annual return was 21.42% across five occurrences.
Other ranges showed varied outcomes. January gains between 2% and 5% corresponded to an average annual return of 10.02% over seven occurrences. Slight January gains of 0% to 2% saw an average annual return of 16.42% over six occurrences.
Past market crashes illustrate the data. In 2022, the S&P 500 fell 19% for the year after a January decline of about 5.3%. During the Great Recession, a January 2008 drop of over 6% preceded a 38% annual decline.
However, the dot-com crash year of 2002 saw the index fall 23% annually despite only a 1.6% January decline. Market downturns can begin suddenly, as seen in 2020 when a pandemic rapidly impacted markets.
Investors are advised to diversify portfolios and consider protective measures. Focusing on dividend stocks, utility stocks, and low-beta stocks that don't move in unison with the S&P 500 can reduce risk. Value stocks are recommended over those with high valuations.
The Motley Fool Stock Advisor team recently identified ten stocks they consider better investments than the S&P 500 Index. Their historical recommendations include Netflix in 2004 and Nvidia in 2005, which generated significant returns. Stock Advisor's total average return is reported as 952%, compared to 195% for the S&P 500.