Should We Still Count On a Year-End Rally?
It is said that history doesn’t repeat, but that it often rhymes. And based on my experience, this is certainly true in the stock market. It is this very concept that is behind the study of seasonality on Wall Street. As we’ve discussed a time or twenty in this space, historical cycles in the stock market tend to be pretty powerful. Generally speaking, stocks largely follow a seasonal pattern – well, except when they don’t, of course!
This year is an example of when traders simply ignored the seasonal tendencies and went a different direction. As in the polar opposite direction, that is. Instead of the meaningful correction that was projected to occur between August through October (a decline that might wipe out the year’s gains), investors looked ahead to better days for the economy and earnings, as well as the good stuff from tax reform, and powered the U.S. stock market to a series of new all-time highs.
The question, of course, is if the positive seasonal cycles that tend to occur at this time of year are still on the table. In other words, if the meaningful decline didn’t happen during the fall, can we really expect the traditional year-end rally to materialize? Or will the market just continue to go the other way and make a complete mockery of the seasonal cycles?
For answers to this question, I turned to the computers at Ned Davis Research. Here’s what I learned…
First, we need to recognize that this year’s “fall correction” (if you can call the decline of 2.2% that occurred in mid-August a correction) was one of the smallest on record. In fact, this year’s “fall pullback,” which have averaged -9.9% since 1928 (as defined by the total decline seen on the S&P 500 between July 31 and October 31 during calendar years), was the sixth smallest seen in history. You have to go back to 2006 to find a smaller decline (-1.5%) and back to 1968 before that.
The point should be clear. Despite the fact that the fall pullbacks have been pretty small over the last two years doesn’t overshadow the fact that declines of less than 5% during the August – October period are rare.
Getting back to the question at hand, there is good news when looking ahead from an historical perspective. You see, in years when the fall pullback was less than 5%, NDR tells us that the average gain for the November – December period has been 3.7%. This compares very favorably to the average gain seen for all Nov-Dec periods of 2.1%.
In addition, the odds of a gain during the final two months of the year also improve handily here. When the fall pullbacks have been less than 5%, the S&P 500 has produced a gain in the Nov-Dec period 82.1% of the time, which, again, is better than the historical average since 1928 of 69.7%.
I will also note that the years in which the S&P 500 did decline during the last two months of the calendar year had something in common. Cutting to the chase, since the turn of the century, the only time stocks declined instead of advanced into New Year’s Eve, was when the bears were in control of Wall Street (2015, 2007, 2008, 2002, 2000).
The key takeaway here is that despite the fact that the market simply ignored the negative tendencies during the August – October period this year, the odds of additional gains for stocks during the last two months of the year are actually pretty darn good.
So, unless something comes out of the wood work that would cause traders to ignore the strong seasonal cycles here (something like Tax Reform falling on its face or the economy suddenly hitting a speed bump, for example) we should probably give the bulls the benefit of any/all doubt and continue to buy the dips.
Thought For The Day:
The most powerful warriors are patience and time. -Leo Tolstoy
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Tax Reform
2. The State of the Earnings Season
3. The State of Fed Policy/Leadership
4. The State of the Economy
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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