Monday, June 26, 2023
It had been a strong recent run for stocks, as measured by the S&P 500 Index, with the index recording five consecutive weeks of gains but the streak came to an end on Friday with a negative 1.4% weekly return. We decided to take a look at what has historically happened next when an S&P 500 weekly streak of this length has come to an end, as well as looking at streaks for the NASDAQ 100 index.
Looking at S&P 500 performance data going back to 1950 there have been 57 occurrences of streaks of positive returns ending after five weeks. The average returns looking out over the next 12 months, after a five-week positive streak, show a return profile that is slightly below the average seen over all weeks during the study period. In the three months after the positive streak ended stocks have shown very tepid returns of 0.4% compared to all week average of 2.1%. Six- and 12-month returns following the end of a 5-week streak have also been below the study period average. Based on the historic data, had the streak extended into a sixth week, performance may have still been muted within a three-to-six-month period compared to the all-week average numbers.
The NASDAQ 100 Index, which has a higher market weighting to the technology sector and growth-style stocks, also recently went on a streak, of six consecutive up weeks, which ended by finishing very marginally down (0.04%) during the week ending June 9. Streaks of this length appear to be a bit of a sweet spot for this index historically, with the 14 times this has occurred since 1985 leading to roughly average three-month returns but significantly above average returns over the six- and 12-month periods. Streaks of seven or more up weeks in this index don’t appear to exhibit the same lag in forward returns as the S&P 500. Longer weekly win streaks for the NASDAQ index have actually tended to carry momentum forward over the short term with the three-month returns around average and then above average for six- or 12-month returns.
What does LPL Research believe this data can tell us about the current environment for stocks? From a tactical asset allocation perspective, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) recently reduced our equity positioning to neutral on the basis that equities may have gotten over their skis a bit. The STAAC recognizes the possibility of more potential upside in equities in a “melt-up” type scenario. However, as shown in the data above, these types of runs often are followed by at least shorter periods of weaker equity returns so further gains for the S&P 500 may be more modest, and could come with more volatility than we’ve experienced during the first half of the year. Based on the historic performance data, stocks that exhibit more growth-style characteristics may continue to ride the positive momentum trend.
The STAAC is overweight fixed income relative to cash, with bond yields at levels that we have not seen in decades outside recent peaks. The equity risk premium has been greatly reduced, and as such the risk reward trade-off between stocks and bonds is much more balanced now. Attractive fixed income yields can help mitigate potential equity market volatility, boost income, and, given the STAAC’s outlook for interest rates, have the potential for capital appreciation over the intermediate term.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking #1-05374112