There’s no reason to fear mean reversion after outsized monthly stock returns
The S&P 500 (SPX) gained more than 9% in July, marking the index’s biggest month since November 2020. This stellar month, however, simply erases the losses sustained in June. Now could be a good opportunity to see how stocks have performed after huge months. Plus, I will break down historical monthly spikes in a few different ways to relate it to our current environment.
Big Monthly Gains
The SPX has gained 7.5% or more in a single month no fewer than 34 times since 1950. The table below shows how the index performed after these occurrences. The second table shows typical returns for the index for comparison. Historically, strong months beget strong returns.
The next month after these big monthly returns, the SPX has averaged a return of 1.6%, with over 70% of the returns positive, which easily beats the typical monthly return. Six months after strong monthly gains, stocks average a return of 8.3%, compared to a typical six-month return of 4.4%. In other words, there’s no reason to fear mean reversion after outsized monthly stock returns, like we just saw.
Rebound Months
Before July’s 9% return, the SPX lost over 8% in June. In fact, the index is still below its May close. There were five other times the SPX gained more than 7.5% in a month after losing at 7.5% in the month prior. I have the specific dates of these occurrences in the table below.
It’s only five data points, but based on this, now might be a great time to buy stocks. Six months after these rebound months, the SPX was positive every time, with an average return of 15%. A year after these instances, the index was up every time, averaging a gain of almost 30%.
The minimum 12-month return after these rebound months was 18.6%. The last time we saw this was in April of 2020, when stocks were rebounding from Coronavirus-related lows. Over the next year, the SPX gained over 40%.
Room to Run
Even after the strong July, the SPX was still 13% below its all-time high. The table below shows there were 15 other times the index gained at least 7.5% during a month and was still over 10% away from it’s prior high.
The results are once again bullish. The average return after these instances doubles the typical average return at one, three, and six months. A year after these instances, SPX gains averaged 17.2%, compared to the typical 9.2% return. The percent of positive returns is 80% at each time frame I looked at, which also beats the typical returns at every time frame.
