Stocks finished the first five trading days of 2020 higher, setting up for potentially strong performance in the full year, based on an old Wall Street indicator.
If stocks perform well in the initial couple of sessions in a given year, the market is often up at year-end, according to the "first five days" rule.
Stock Trader's Almanac, which studied the market phenomenon going back to 1950, found that the first five days have a good track record of predicting the whole year. When stocks finish that period higher, the S&P 500 has been positive 82% of the time at year-end with an average gain of 13.6%, according to Stock Trader's Almanac and CNBC calculations.
The S&P 500 rose nearly 0.5% on Wednesday, notching a new intraday record high and bringing the gains of the first five days to about 0.7%. It wasn't all smooth sailing, however, as an escalation in U.S.-Iran tensions during the period spooked investors.
On Jan.3, the S&P 500 suffered its worst day in a month, sliding 0.7%, after a U.S. strike killed a powerful Iranian general, which sent oil prices surging. After the initial sharp sell-off, investors came back on Monday reassessing the geopolitical situation, largely shaking off the concerns. Monday saw the S&P 500 up 0.4%.
The S&P 500 pulled back 0.3% on Tuesday as investors sought out more clarity on the Middle East unrest. On Tuesday night, Iran retaliated by attacking on an Iraqi airbase that houses American troops, triggering a massive sell-off in overnight trading.
On Wednesday, stocks jumped to records after President Donald Trump toned down rhetoric against Iran, announcing further sanctions on the country but not more military force. Trump also said Iran appeared to be "standing down."
"No doubt worries over Iran have investors on edge," Ryan Detrick, senior market strategist at LPL Financial, said in a note. "Stocks could be volatile for a while, but the impact to stocks from geopolitical events historically has tended to be short-lived."
The market managed to finish the first five days in the green, sending a bullish signal for 2020. But the first five days were certainly volatile, perhaps a signal it's likely to be a roller coaster year. Wall Street analysts are largely expecting the market to churn as the presidential election and more China trade talks add additional uncertainty to the market.
To be sure, it's only five days of trading and it's possible the good track record of this indicator is just coincidental since stocks tend to go higher over time.
Still, the start of the year is an important time for investors to put money to work, which could reveal their bias for the year. The market's strong performance so far also sets up a good sign for another one of Wall Street's favorite seasonal gauges — the January barometer.