After a big quarterly comeback, SPX stocks have historically outperformed in the short term, but not longer term
The S&P 500 Index (SPX) moved higher over the last few days of the first quarter to eke out a gain, after being down by over 10% earlier in the quarter. The only other time the index was down by double digits in a quarter and then ended positive was the fourth quarter of 1933, over 80 years ago. Will stocks ride this momentum going forward, leading to gains -- or is the rally exhausted? This week I'll look back at other times the index made huge runs to end a quarter, and see what tends to happen going forward.
Biggest Comebacks: The 10.5% deficit that was made up by the end of the quarter was the second-largest comeback for the period in which we have data on the SPX (since 1929). In 1933, the index was down over 11% during the fourth quarter before ending the quarter positive. The table below shows each time a quarter finished positive after being down by at least 6% at one point during the quarter. I also show how the SPX performed over the next month, quarter, and six months following these comebacks.
The last four times this happened were particularly interesting. The third quarter of 1996 and fourth quarter of 1997 were good times to buy in and ride the momentum. Stocks enjoyed double-digit gains over the next six months, with more gains to go before the tech bubble popped. The next two times, the first quarter of 2000 and third quarter of 2007, proved to exhaust the buyers, marking major market tops. Are buyers exhausted now?
Below, I summarize the data after big quarterly comebacks and compare it to other quarters. The quarter following a comeback has averaged an impressive 4% return, but when you go out further to six months, the returns are in line with other quarters. One thing I did not expect in the numbers was that the returns going forward showed lower volatility after big comebacks, as measured by the standard deviation of the returns. I expected the comebacks to be an indication of a volatile environment.
Rallies Off the Lows: The previous quarter went from negative to positive within the last week of the quarter to make the list of great comebacks. I don't think a few more points lower on the SPX would change the expectation going forward. The bottom line was that stocks started off the quarter on a bad note and then shot higher to finish off the quarter. Therefore, I looked at this from another angle. The first table below summarizes results when the index was down by at least 5% at some point during the quarter and then rallied at least 10% from there to end the quarter.
In this case, with more data points, we get some outperformance in the short term (the next month), looking at the average return and percent positive. The next quarter shows slight outperformance, and then longer term (six months) shows returns pretty much in step with typical returns. If I were to make a conclusion based on these two ways of looking at it, I would say the tendency is to see some outperformance over the next month, and then potential land mines longer term (based on the 2000 and 2007 comeback signals above).
