Through the end of the July, the S&P 500 in the US posted simple (ex-dividend) returns of 18.2%. Interestingly, this represents the 8th best yearly return for the first seven months of a year in the 64 instances going back to, and including, 1950. This also represents the strongest performance through July of any year since 1997.
How do returns typically shake out the remainder of the year after a strong start through the early summer months?
Returns have shown consistent strength during the final months in years with strong positive performance through July.
Prior to this year, there were 20 years, roughly one-third of the years captured in this exercise, with January to July returns exceeding 10%. In 20 out of 21 instances, returns were positive for the remainder of the year. 1987 proved to be the only exception with a -22.46% August to December loss, reflecting the carnage of the October 1987 crash. 1987, though, also produced the best returns for the first seven months in the entire sample, up 31.6%.
For the years with 10%+ returns over the first seven months of the year, average return for the final five months is 5.16% and median return is 4.19%.
Overall, the direction of performance through July (positive or negative) has corresponded with performance in the final fall/winter months of the year. The deck is stacked, though. There were only 17 years out of 63 in which the direction of performance for the final months differed from the direction for the months through July (i.e. negative final months vs. positive first seven months and vice versa). However, as mentioned, only one of the years in the top 20 (1987) showed this divergence, meaning that in 16 of the 43 years outside the top 20 (almost 40%), the direction in the final months reversed.
What are the quick takeaways? First, as always, a disclaimer: past isn’t prologue. Just because the record has been so consistent doesn’t mean the bottom can’t fall out the remainder of the year. Second, and obvious, it’s remarkable how consistently strong the continuation pattern is for years with very strong starts. This continuation has occurred during vastly different market valuation environments, for instance. The maximum 10-year P/E at the end of July among the top 20 performance instances was an extreme 35.4x in 1998; the minimum was 9x in 1980. The average mid-year normalized 10 year P/E for the top-20 years was 18.2x and the median was 18x, above the long-term average of 17.5x and long-term median of 16.5x. Thus, one can’t attribute the phenomenon to extremely low valuations or washed out periods. Perhaps, market psychology takes over during the “strong start” years and performance chasing becomes pervasive, carrying returns in the subsequent months. 16 of the top-20 years (prior to this year) occurred during secular bull periods. However, only three of those 16 secular bull occurrences, 1997, 1998, and 1967, fall at or near the very end of the secular bull cycle, periods generally associated with parabolic upward moves as the final money pours into the secular bull and optimism becomes extreme. Similar to 2013, these could be years where disbelief in the rally, the proverbial “wall of worry”, is present and portfolio managers and individuals are hurrying to play catch up. On that note, we only have AAII bull/bear data since the middle of 1997; in the seven instances in the top-20 starts with bull/bear data, all seven showed bulls exceeding bears at the end of July, maybe undercutting the “wall of worry” notion.
Nonetheless, it’s an interesting bit of persistence, and could provide some hope for the remaining fall and winter months that the good times will last, even in the face of higher than average long-term valuations.
1950 to 2013: Years with 10%+ Returns through July and Subsequent Returns
