The S&P 500 is on track for its sixth consecutive positive month, but with all-time highs becoming increasingly normal, should we expect the market to slow down or continue higher?
It’s been a productive month for domestic equities, with the S&P 500 (SPX) on track to finish October positive for the first time since 2022, extending its positive streak to six consecutive months. Streaks of six months or longer only happen every three years or so, and our current streak is the longest since its streak from February to August 2021. With all-time highs becoming increasingly normal as the market continues pushing higher, should we expect the positive streak to end sooner rather than later?
To evaluate the impact of consecutive monthly gains, we looked at every month going back to 1950 and categorized them based on their positive streak length entering the month. The table below summarizes how often each streak length occurred and the likelihood of the following month being positive. Looking at the S&P 500 going back to 1950, there have been 23 positive streaks spanning six months or longer. Those instances took an average of 1.65 months before the index finally had a down month, which is slightly above the 1.55 months for all instances. Additionally, 16 of those 23 months continued the positive streak. Put simply, the next month was positive 70% of the time, which is again higher than the 61% for a typical month. Consequently, periods of continued strength are more likely to continue moving higher relative to a typical month. While the market continues gains in the presence of a streak, has that historically translated into returns?
Analyzing every month dating back to 1950, we can look at the forward return of the S&P 500 depending on its streak length coming into the month. Streaks of six months tend to see above-average long-term returns, with returns outperforming the average month after three months. Specifically, the market averages a one-year return of 11% when on a six-month streak, outpacing the typical one-year return of 8.1% by a notable margin.
Additionally, the performance of the market appears to gradually trend higher the longer SPX’s streak is, which is more apparent in the chart below. The six-month return for the S&P 500 during all months is 3.9%, represented by the dotted blue line. However, the actual one-year return depending on the length of its positive streak (solid blue line) is consistently above average when on a streak of three months or longer. Meanwhile, the typical one-year return for the S&P 500 is 8.1% (dotted green line), and the S&P 500’s forward return by streak length (solid green line) is above that baseline average when on a streak of two months or longer. Consequently, a longer positive streak is generally a sign of continued strength for domestic equities.
The most apparent rationale behind the phenomenon is our favorite eight letter word: momentum. The longer that trends establish themselves, the more weight or impact they carry behind them, which helps explain the greater outperformance given consistent prior gains. With the S&P 500 poised to extend its positive streak as October ends, we should have further confidence in the market’s strength as we look ahead to the next several months.
