Hi YXI friends,

Today, we will look at the historical performances of SPY (S&P 500 Index ETF) after a strong January being followed by tariff implementation on Canada, Mexico, and China.

We discussed the impact of tariffs in yesterday’s article - please read it here if you haven’t already. Here, I will share my expectations for SPY for both 2025 and the longer term.

Finally, we have the usual seasonality analysis at the start of the month for SPY, QQQ, IWM. The seasonality analysis looks through both the monthly returns and the intra-month daily returns on specific calendar days. While history doesn’t repeat, it often rhymes.

A word of caution: Roses are red. So is post-Valentines for stocks.

Let’s begin!

Table of Contents

• 1. The Importance Of A Positive January

• 2. Expectations for SPY in 2025

• 3. How About The Next 10 Years?

• 3. February Seasonality: SPY, QQQ, IWM

  • SPY

  • QQQ

  • IWM

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. The Importance Of A Positive January

Despite the recent volatility, S&P 500 has got off a very positive start this year. This is an encouraging sign for how the year may finish.

After the 20 trading days of January, SPY is up 2.7% YTD. This is the 11th best start since 1994. While China’s DeepSeek AI narrative coincided with a large market sell off on Monday January 27, SPY has managed to claw back the losses and now trades only 1.5% below its all-time-high.

(Please do feel free sharing this chart, referencing YX Insights)

Out of the 20 years where SPY traded positively after 20 trading days into the New Year, only 4 years failed to show positive returns.

Among these four negative years, the worst performance was a -5% return in 2018 (including dividends). But remember 2018? That was the last trade war.

The scenario looked familiar as the market enjoyed a nice run up (22% returns) in 2017. At the beginning of the year, market became concerned about the Fed hiking rates too fast, triggering a 12% selloff in S&P.

The US-China trade war started tariff implementation in July, but the market actually recovered to a new all-time-high by September. Then there was a money-market funding crisis due to low bank reserves (SOFR and Fed Funds rate spiked). Finally, the market further tanked in December, even as Xi and Trump reached a 90-day truce at the G20 Summit.

After all that round-trip volatility, 2018 still saw a very moderate loss of 5%.

Back to today, this bull market is still very young, only 2 years old.

In the past 30 years, the shortest bull market we had was 2019-2021, the 3 years that doubled the SPY.

The caveat is that three years of back-to-back 20%+ returns is rare - we last saw that only before the Dotcom bubble. Having achieved 26% and 25% returns in 2023 and 2024, getting another 20%+ year in 2025 would be a tall hurdle.

The current valuation also calls for a more moderate return in 2025 versus the last two years.

SPY currently trades at 29.5x P/E multiple based on the last-12-month earnings, or 23x based on the next-12-month earnings. This is approaching the 2 standard deviations above the 20-year mean. The last time we saw the current valuation level was in June 2020 - the market peaked 18 months later in December 2021.

The problem with fading expensive valuations is that the market can climb expensively higher in the near-term, on which value investors would miss out.

Being on the sidelines would be completely fine for the truly long-term investors who don’t worry about fund outflows, benchmark outperformance, or peer performance. Warrent Buffett is raising a tonne of cash in this environment. No one can time the market top perfectly, so selling or hedging when things get extended does make sense for downside protection.

However, it is psychologically challenging for short-to-medium term investors who are competing for capital and outperformance to watch and do nothing as the market continues its climb. “Bears sound smart, but bulls make money”. This is why we see the rapid rise of Magnificent 7 stocks have only attracted more capital to the group, despite some of them having dubious revenue growths amidst enormous capital expenditures.

2. Expectations for SPY in 2025

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