The S&P 500 Index has gained more than 20% so far this year, making more than 50 record highs along the way. No one should be upset if that was all 2021 brings us. However, there are signs more gains could come in the final two months of the year. Seasonal tailwinds, improving market internals, and clear signs of a peak in the Delta variant all provide potential fuel for equities heading into year-end,
One important point investors should recognize is that there has been a stealth correction going on throughout most of the summer, consistent with the historically weak period commonly referred to as “Sell in May and Go Away.” While the S&P 500 has returned more than 8% since the end of April, the average individual stock in the index suffered more than a 10% correction. Meanwhile, the average stock in the Russell 2000 Index (covering small cap equities), which is almost unchanged over that period, suffered a more than 25% bear market.
However, late October has historically marked the seasonal low before stocks often rally into year-end. In fact, the fourth quarter is by far the strongest quarter historically, on average, with the S&P 500 rising 4% and finishing higher nearly 80% of the time. November, meanwhile, is the strongest month of the year—both since 1950 and over the past decade. So, whether you believe that stocks have thus far followed the historical pattern of summer weakness that should be ending, or that the current price trend is so strong that it was able to buck the summer doldrums, there is ample reason to believe seasonality has now turned from a headwind for equities to a tailwind.
Seasonality is something that we should be aware of, but perhaps more important are what technicals and market internals are showing right now. Economically sensitive stocks, commodities, and even bond yields, which have largely stagnated since early May have shown signs of life. For example:
- The S& 500 Financials Sector just broke out to a new all-time high after being largely unchanged from May 7 through October 13.
- The Dow Jones Transportation Average is up more than 10% in October alone—and at a three-month high after suffering a 13% correction.
- Copper, often referred to as Dr. Copper for its ability to forecast economic conditions, has gained more than 10% since bottoming in August.
- The yield on the 10-year U.S. Treasury is up more than 50 basis points (0.50%) since its low in July.
- Consumer discretionary stocks have outperformed consumer staples stocks by 10 percentage points in the past two months after lagging them for much of the summer.
There are more examples, but perhaps we should not forget the most important indicator: price. After finally suffering its first 5% pullback of 2021 in early October, the S&P 500 has come back and closed at a record high on October 21. New highs are something to be embraced, not feared, and history shows that new highs tend to come in bunches—something that has certainly been true so far this year.
Though the above points may be construed as a technical argument for strength into year-end, make no mistake: fundamentals are improving in real time as well. The rolling seven-day rate of new COVID-19 cases has fallen over 60% from its peak in early September. No doubt connected to the decrease in cases, jobless claims have fallen steadily, too, with continuing claims sliding below 2.5 million for the first time since the pandemic began.
Recent economic data show that Americans have taken notice of the improved outlook. Economists expected retail sales to fall slightly in September, but the report showed that overall retail sales grew 0.7%. Despite the impact of the COVID-19 Delta variant wave, retail sales have grown three out of the past four months, providing further evidence of the strength of the U.S. consumer. Finally, the U.S. Bureau of Labor Statistics (BLS) latest Job Openings and Labor Turnover Survey (JOLTS) report showed that the number of American workers who are voluntarily quitting their jobs is at its highest rate since the BLS started publishing data in 2001. Typically, “quits” are viewed as a sign of a strong economy and healthy labor market, as the most common reason for people voluntarily leaving their job is to start a new one—something workers are more hesitant to do in times of economic uncertainty.
A bullish part of the calendar, improving equity market internals, and falling COVID-19 cases may clear the way for a potentially bullish environment for equities through year-end.
The views expressedare provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Data provided by LPL Financial and the Bureau os Economic Research.
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,