August 31, 2020
Stocks continue their record comeback. The S&P 500 is up 7.2% over the past month, on track for the best August return since 1984. Another sign of strength is that the S&P 500 is now set to have risen for five straight months. This has only occurred 27 previous times since 1950. Following 26 of those previous instances, or 96% of the time, stocks were higher 12 months later. Similar five-month winning streaks were seen in the early stages of the 1974, 2003, and 2009 bull markets. This is consistent with other studies we have highlighted over recent months that provide evidence that strong momentum in the first stage of a bull market is common and typically a good longer-term sign.

However, it is notable that after such strong monthly winning streaks, near-term stock returns tend to moderate as one would expect. The average three-month forward return after past streaks was 3%, and stocks were up 63% of the time.

That said, some observers are now questioning whether a pullback at some point is even possible while the Federal Reserve’s policy remains so accommodative. Our response is an unequivocal yes. We do not want to become complacent. Recall that despite very easy monetary policy for most of the last bull market, which lasted from 2009 until earlier this year, there were 19 pullbacks of more than 5%, even while the market gained more than 400% over the entire period. Even strong markets do not move in a straight line.

As a frame of reference, since the market rebound kicked off in March, there have been two pullbacks of at least 5%. The last setback occurred in June. Recent bull markets have tended to have three or four setbacks during the first nine months. Thus, there is a decent probability that markets see at least one more setback before year end. That said, our focus remains on the primary market trend, which our work suggests remains higher.

It’s normal to see several pullbacks during the first nine months of a new bull market.
Volatility should also be expected as we get closer to the election. In fact, the volatility index (VIX) has risen in October in each of the seven presidential election years since 1992.
Volatility tends to heat up closer to an election and then recede thereafter.

Bottom Line

The weight of the evidence in our work suggests that we are in a new bull market. Stocks’ five-month winning streak is also consistent with our view. That said, investors should not become complacent. Even in bull markets, there are periodic setbacks, which we view as the admission price to investing in equities. Our work still suggests the primary market trend remains higher, and that is where our focus remains. For investors who are currently below longer-term equity targets, we would advise an average-in approach and becoming more aggressive should we see pullbacks later in the year.


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