Since the February lows, equities have been in a very impressive bullish trend. As we noted in our Weekly Market Commentary, “Taking Stock After the Rally,” this week, the S&P 500 gained more than 14% in 9 weeks. This is a rather rare event that indicates some near-term strength, but eventually evens out longer term.
Another interesting development is the S&P 500 has made a higher weekly low for 9 straight weeks; barring a 2.5% pullback today, it will make it to 10 straight weeks with a higher low. The last time this happened was in early 2011 and that streak actually made it to 11 weeks. The S&P 500 has been strong lately, we know that…so, what happens next?
Going back to 1970, this could make only the 10th time the S&P 500 has 10 consecutive weeks with a higher weekly low. The longest streak ever was 13 weeks from late 1972 and early 1973. The overall results are somewhat similar to our study in the Weekly Market Commentary—near-term strength, but as we move further out, things revert back some.
Four weeks later, the average return is actually down 0.5%; while 8 and 12 weeks later, results are either in-line or stronger than the average return. Going out to 24 weeks is where it gets interesting. The average return is 2.5% with a negative median return; but the past five times this has happened, the S&P 500 was lower 24 weeks later as well.
This is only one study, but it is interesting that the weak long-term term results are quite in-line with the 9-week study we did earlier this week. We continue to expect mid-single-digit returns in equities this year,* but heavy bouts of volatility could come back and it will be anything but a smooth ride.
*Historically since WWII, the average annual gain on stocks has been 7-9%. Thus, our forecast is roughly in-line with average stock market growth. We forecast a mid-single digit gain, including dividends, for U.S. stocks in 2016 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid-to-high-single-digit earnings gains, and a largely stable price-to-earnings ratio. Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2016.
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
Stock investing involves risk including loss of principal.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial LLC.
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