Why Three Consecutive Monthly Gains Has Bulls Smiling

The S&P 500 has gained for three consecutive months, coming on the heels of its first three-month losing streak in more than four years. This is actually the first three-month win streak since June 2014, and it could bode well for potential outperformance in the near term. In fact, since 1960, there have now been 142 three-month win streaks, with an average return three months later of +2.6%. This in comparison to the average three-month gain of +1.9% (when not following a three-month win streak). Going out six months the average goes to +5.0% versus +3.9%. Perhaps strength begets strength?

What if the three-month win streak comes on the heels of a new 52-week low? Remember, the February low took place at a new 52-week low, only to be followed up with three straight higher months. Are three straight monthly gains more significant when they take place after a 52-week low? It sure looks like it. Going back to 1960, there were eight previous times this happened. Three months later, the S&P 500 was higher six times with an average return of +4.9%, and a median return of +6.0%. The worst return was just a 2.1% drop in 1988. Going out six months, the returns are still strong, up +6.8% on average with a huge median return of +9.0%.

Lastly, what happens after March, April, and May are all higher—like they were this year? Once again, it bodes well for some potential outperformance the rest of the year. Since 1960, this has happened 16 other times, and the rest of the year was higher 13 times for an average gain of 7.9%. This return is more than double the average return for the last seven months of the year of 3.7%. Just as impressive, the worst drop was only 4.1% in 2007.

Three consecutive monthly S&P 500 gains usually lead to stronger than usual returns for the next three to six months, especially when this occurs after a new 52-week low, such as we saw this year. We continue to expect a volatile second half of the year, but with eventual new highs, along with mid-single-digit gains for equities when all is said and done.* This study does little to change our mind on this forecast—in fact, it reinforces it.


*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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