What Q1 performance tells us about stock markets?

The first quarter of 2024 on the markets is heading to a close. When it comes to equity markets, it is virtually over already, as there will be no trading session on the majority of markets today. It could be a good opportunity to look at how indices performed in Q1 and what seasonality tells us about the remainder of the year. We have taken a look at 11 indices - 4 from the US, 4 from Europe and 3 from Asia-Pacific.

Q1 performance of 11 selected indices. Source: Bloomberg Finance LP, XTB

Taking a look at the table above, we can see that each of 11 selected indices performed better in Q1 2024 than suggested by 5- and 10-year averages for the period. However, it should be said that those averages, and especially 5-year average, is heavily distorted by a black swan event in 2020 - Covid pandemic. Japanese Nikkei (JAP225) was a clear outperform this year, gaining over 20% in the January-March 2024 period. However, three other indices (S&P 500, Euro Stoxx 50 and DAX) also recorded double-digit growth in the Q1 2024.

This information alone tells us only that indices performed better than they used to historically, but does not tell us anything about the future. Full-year performance of the 11 selected indices was presented in the table below. Comparing these two tables leads us to some interesting conclusions.

Full-year performance of 11 selected indices. Source: Bloomberg Finance LP, XTB

We can see that in around 50-60% of the past 10 years, a positive return in the first quarter of the year was followed by a positive return on a full-year basis in that year. However, there is one outlier here - HSCEI. In case of the Chinese index, such a relationship occurred only in 20% of analyzed years.

Was Q1 and full-year return positive? Source: xStation5

However, positive Q1 and full-year returns in the same year does not necessarily mean that indices continued to gain beyond the first quarter. After all, Q2-Q4 return could be negative, but not negative enough to offset positive return from Q1. Having said that, we have decided to analyze whether full-year return was higher than Q1 return in periods when both were positive. Results can be seen in the table below.

Was full-year positive return higher than Q1 positive return? Grey tiles indicate years in which Q1 and FY returns were not both positive. Source: Bloomberg Finance LP, XTB

As one can see, in the majority of the cases it was. In fact, over the past 10 years, each time US indices gained during the first quarter, they continued to gain in the remainder of the year and finished the year above end-Q1 levels. This was also the case with Australian S&P/ASX 200 index. However, this correlation was not as strong in case of European and other Asia-Pacific indices. Nevertheless, in the majority of years when Q1 and full-year returns were positive, European indices finished the year above end-Q1 levels.

Last but not least, how big those Q2-Q4 gains were after positive Q1? The answer is they were substantial, especially in the United States. In the table below, we have presented Q2-Q4 returns for years when positive Q1 and full-year returns were positive. As one can see, 5- and 10-year average Q2-Q4 performance has been positive for almost all indices, spare for HSCEI. Moreover, 5-year average for European indices significantly exceed 10-year averages. The main reason behind this is that 10-year average includes a period of euro area debt crisis.

This is not the case for US indices, which tend to have 5- and 10-year averages more closely aligned.

Q2-Q4 returns in years when Q1 and full-year returns were positive. Grey tiles indicate years in which Q1 and FY returns were not both positive. Source: Bloomberg Finance LP, XTB