Seasonal Tailwind: Nov/Dec US Equity Returns

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Seasonal Tailwind: Nov/Dec US Equity Returns

With October rapidly drawing to a close, today we have an update on our seasonal US equity return and volatility analyses to see what they signal for the S&P 500’s performance in November and December. In our last review at the end of September we showed that since 1980, on average, October (+1.1 pct) not only recoups September’s typical losses (-0.6 pct) but also adds to the year’s gains. With just 4 trading sessions left in October, that pattern is playing out again (S&P down 4.8 pct in September vs. up 6.0 pct MTD).

So what can history tell us about S&P returns during the balance of 2021? Three points:

#1: The S&P usually rallies in November and December. Since 1980, the S&P 500 has been higher nearly three-quarters (73 pct) of the time in the last two months of the year, and up an average of +3.3 pct overall. When the S&P is higher in November and December, it’s gained an average of 5.6 pct compared to a loss of 3.1 pct during years with a negative return for those two months.

#2: Positive momentum in October helps drive better returns during the remainder of the year. For example, the S&P has only rallied +5 pct in October in 8 years or a fifth of the time since 1980. During those years, the S&P was up 8.0 pct on average in October. In the following November and December, the S&P was up an average of 3.8 pct and advanced nearly two-thirds of the time (63 pct, slightly lower than in point #1 but not statistically significant).

This momentum also works in the other direction: the S&P has only been down by 5 pct or more three times in October since 1980, but also fell in November and December in each of those years (down an average of 4.7 pct across the 2 months).

#3: This may seem like simple math so far, but the seasonal downward bias in volatility in November and December puts some further context around the S&P’s usual drift higher during those months. The data:

  • The VIX has fallen from the last day in October through the end of December during 18 years since 1990 (first full year of data), or just under 60 pct of the time.
  • The VIX has dropped by an average of 4.5 pct in November/December over the last 3 decades, while the S&P has risen by an average of 3.4 pct over that timeframe.
  • The correlation of returns from the close on the last day in October through year-end for the VIX and S&P 500 is negative 0.37 since 1990.

The upshot: US equities usually drift higher into the end of the year, which is why the VIX tends to fall. While the S&P is already up a strong +21.6 pct YTD, history points to another +3 pct gain during the balance of this year. That math is also backed up fundamentally. For example, as Nick continues to outline during his corporate earnings reviews on Sundays:

  • The Street’s 2021 S&P corporate earnings estimates are up 22 pct since the start of the year, which explains the S&P’s YTD advance of the same magnitude.
  • As Nick said last night, despite Wall Street analysts raising their 2021 estimates again, they are still low by 3 pct when assuming that Q3 and Q4 S&P earnings at least match Q2’s print. That’s a reasonable expectation given that Q3 results are already tracking with Q2 results.

Therefore, that 3 pct upside potential for S&P returns during the rest of 2021 based on our seasonal analysis also fits with how much earnings revision we can expect over that period as more companies report. Should this come to fruition and filter through to prices, the S&P could end the year up around 25 pct.

Bottom line: we expect modest gains (3-5 pct) from here through year-end as US equities keep showing positive price momentum amid a seasonal downtrend in volatility and continued increases in earnings estimates. It would likely take an economic (i.e. interest rate) or geopolitical (i.e. oil) shock to keep US equities from drifting higher.