What This Rare S&P Feat Could Mean for Stocks in 2018

The second half of December is the best time to be in stocks, typically

Senior Quantitative Analyst
Nov 29, 2017 at 7:00 AM
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Barring a significant pullback over the next couple of days, the S&P 500 Index (SPX) will coast into December on an eight-month winning streak. Below, I look how stocks have performed in December, and then how they’ve done after these winning streaks, which we've seen just nine other times in history. This might give us an idea of what to expect in the coming month and in 2018.

December Returns for the SPX

Based on the SPX over the past 50 years, December has been the best month of the year as far as average returns and percentage of positive returns. The index has averaged a December gain of 1.48%, with 72% of the returns positive.

S&P 500 Monthly Returns Chart 1

Looking at just the past 20 years, the average return of the index is almost identical, but ranks fourth, with October, March, and April averaging better returns. The percentage of positive returns is tied for the best month, however, with the standard deviation being the lowest among all months by quite a bit. In short, December has been a solidly bullish month.

S&P 500 Monthly Returns Chart 2

Stocks' Typical December Path

The chart below shows the typical path that leads to the average December return. It’s not a smooth path. The index has generally gotten off to a good start in the first week of the month, but has pulled back to at least breakeven at mid-month. The latter half of the month, generally speaking, has been the best time to be in stocks.

S&P Typical December Path Chart 3

Eight-Month Winning Streaks

We have data on the S&P 500 Index going back to 1928. This is just the 10th time a monthly winning streak has gotten to eight months. Prior streaks were no indication that stocks were overbought. The SPX has done better going forward after eight-month winning streaks, compared to other various streak lengths. Six months after these streaks, the S&P 500 Index has averaged a gain of 7.6%, and was positive eight of the nine times. Typical six-month returns average a 4.15% gain, with 67% positive. Then again, more times than not after an eight-month win streak, the SPX was down over the next month.

S&P 500 Monthly Returns Chart 4

Finally, the table below shows data on each of the individual streaks. I also included the index return during each streak, and the percentage of bulls in the Investors Intelligence (II) poll. You would expect the percentage of bulls to be quite high after eight-month win streaks. This latest streak has shown the smallest return for the S&P 500 Index, but the largest percentage of II bulls. Perhaps this is one reason to taper expectations.

Two other streaks were similar in that they had a small double-digit return during the streak, while the percentage of II bulls was above 55%. One streak in 1964 ended the next month, and the SPX gained just 2.49% over the next year. The second one happened in early 2007, which also ended the following month. Not only that, but the SPX fell more than 4% over the next year, and went on to fall even further during the financial crisis in 2008.

S&P 500 Monthly Returns Chart 5

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