With less than two months to go in the year, the markets have returned a remarkable 23% on the S&P 500 index. Our portfolios are diversified, so we haven’t gained that much, but many policies are in double-digit territory (which represent significant gains in less than a year). With healthy returns already booked, one has to question whether investors will want to cash out and go the beach. I admit that a trip to the Bahamas sounds great right about now.
It is enlightening to look at the statistics for how the S&P 500 typically performs in years that have significant momentum coming into the last two months of the year. One of our favorite research providers, Ned Davis Research, released stats that show how markets that have gains of 20% or more through October finish the year in November and December. They studied 15 different periods since 1927, and what they found was surprising for those who believe in mean reversion.
The data revealed that markets don’t typically pull back heavily after such a strong year into October. In fact, rather than fading into the close, markets usually close in very strong fashion. The average again from November through the end of the year is about 6%, and the median is 3%. While past performance is no indication of future results, history has a tendency to rhyme. If it rhymes this year, then the last two months of the year may be primed for a momentum driven surge into the close.
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