June 30, 2020
The S&P 500’s second quarter gain ranks as its best quarterly return since 1998 and fourth highest since 1950. While the direction of the economy and coronavirus will greatly impact the market’s path forward, it is worth pointing out that following the top 10 best returning quarters since 1950, the S&P 500:

  • Rose the next quarter every time with an average gain of 8%
  • Was higher one year later, nine out of 10 times; the one period that it failed to gain included the 1987 stock market crash

This study also included three periods—1970, 1998, and 2009—where strong quarterly returns were preceded by a quarter that was down more than 10%, as was the case in the first quarter of 2020.

Notably, strong quarterly returns also occurred in the early stages of the bull markets that began in 1974, 1982, 2002 and 2009.

Moreover, the S&P 500’s path since the March low continues to track the initial trajectory of the 1982 and 2009 bull markets. That is, after a strong rally, the market rebound reached a point where those two bull markets took a pause to digest gains and broadly traded in a choppy sideways pattern.
Even in bull markets, there are ebbs and flows and risks. Indeed, since the March rally began, we have already seen two pullbacks of more than 5%. This is typical of recent bull markets and also consistent with the pullbacks seen during the first six months of the 1982 and 2009 bull markets.

Bottom Line

History is only a guide. We do not expect markets to track the past exactly. As Warren Buffett said, if past history was all that is needed to play the game of money, the richest people would be librarians. This seems to be especially pertinent today given the great uncertainty surrounding the pandemic and wider-than-normal potential outcomes.

That said, the weight of the evidence in our work still suggests that we are in a bull market—a bull market that has further to go but became stretched to the upside on a short-term basis in early June. Markets started to bake in a very smooth economic reopening process. We continue to expect it to be an uneven process, albeit with a positive trajectory.

The good news is through this digestion period, markets are working off some of the excesses that had built up, and elevated expectations are being reset. While the fits and starts in the economy and other factors will likely lead to periodic market setbacks, our work suggests this bull market continues to earn the benefit of the doubt, and we retain a positive 12-month outlook.


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