On the weekends, I like to go on long bike rides or
runs. Although refreshing, the events can become monotonous
and my mind can wander toward market related topics. During
this weekend's excursion, the following questions came to
mind: 1) Is this year's stock market return unusual? 2) Can
the rally continue into year end? Let's put this
year's rally into perspective and see what history says about
performance into year end.
The S&P 500 was up 18%, excluding dividends, through the
end of July. The gain seems strong on the surface and may be a
factor which makes investors either cautious or excited about
putting fresh money to work in August. 18% would be a
solid yearly return and we are just in early
It was recently reported that stock investors poured $40 bln
into the equity market in July, so investors are starting to warm
toward owning stocks. The 4-week average of the spread
between the American Association of Individual Investors Bull and
Bear indices was 22.5 last week and on the elevated side of
recent history. Despite these signs of investor interest,
there is a lot of fire power in bond funds and money
market/savings accounts which could rotate into the equity
Looking at yearly returns:
Going back to 1928, the S&P 500 has posted an average
yearly return of 7.22%. The worst return occurred in 1931
when the index sank 47.07%, while the best return occurred in
1954 when the index surged 45.02%.
The S&P 500 was able to post a gain over 18.0% 27 years of
85 years or 32% of the time. It is interesting and
maybe somewhat surprising that the index has been able to post a
gain above 18% almost 1/3
of the time since 1928.
The chart displays an Excel generated histogram of yearly
return. It appears that the majority of returns are clumped
between -12.50% and +27.50%. Using the distribution, 78% of
returns fell in this range.
July to December returns:
There is slightly less than five months left in 2013. As a
result, it is probably more important to look at returns between
the end of July and end of December as a measure of the market's
upside potential this year.
The S&P 500 has a history of struggling between the end of
July and the end of December. Going back to 1928, the
average return is -3.15%. The return has been above 0% 29
of 85 years or just 34% of the time. Thus, the S&P 500
has been down almost 2/3
of the time.
The largest gain was 34.66% in 1931, while the biggest loss
was 32.45% in 1932. The Great Depression seemed to generate
volatility in return. The graphic displays July to December
returns by year.
It is noteworthy that stocks have been down four of the past
five years in the July to December period. The exception was 2009
when the S&P 500 rose just 1.23%. Bulls and bears may
debate what this means for 2013. The market may be due for
a positive return given the track record of weakness in very
recent years - mean reversion. However, the pattern may
embolden bears. The market did rise 15.88% in the
August to December period of 2007 - a period prior to the Great
Recession and bull market for stocks.
Answer to question
: History suggests that the rally in 2013 is not as dramatic as
it may seem. 18% is strong, but is not that unusual
from a historical basis. By itself it does not argue
against further gains. There seems to be room for further
Answer to question 2
: The market does not have a great track record of strong
performance in the July to December period. This result
offsets the bullish vibe from question 1 and argues against a big
finish to 2013.
In my view, the data fits into an idea that the market will
perform well in August, but September to October may be rough
before prices finish the year on an upswing. With the
U.S. and Eurozone economies showing signs of firming given PMI
data, events in Washington may be the determining factors for
price action this fall.
Congress returns from recess on September 6
and must address budget issues, the debt ceiling, for example.
The Fed will also be in play with QE taper debated.
Chairman Bernanke's leadership is coming to an end and the
current QE program is flirting with its birthday.
Continued QE could keep the market bubbling higher.
The correlation between the Fed's balance sheet size (level of
reserve bank credit) and the S&P 500 remains strongly
correlated. QE is an unusual event in history and may color
drawing conclusions from history.
SPDR-DJ IND AVG (DIA): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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