A year ago, we called for the S&P 500 to reach new all-time highs in 2017 and suggested that US equities could experience the final melt-up rally that historically has characterized late-cycle bull markets.
This graph depicts the average performance (excluding dividends) for the S&P 500 in the final 500 trading days of a bull market and the first 250 sessions (one year) of the ensuing bear market.
The S&P 500 has returned an average of 48.35 percent in the final 500 days of a bull market—about 58 percent, if you include dividends—and roughly 25 percent in the final 12 months. Over the past 80 years, the S&P 500 has never experienced a bull market that didn’t involve at least a 21 percent rally over its final 500 trading days and a 10 percent gain in the final year.
On average, the S&P 500’s performance in the final 500 days of a bull market accounts for just over 40 percent of its full-cycle return.
The message is clear: Missing out on a bull market’s final melt-up cycle increases the likelihood that you will underperform over the long haul. Investors are better off paring their equity exposure a few months after the market tops than running the risk of bailing out too early and missing out on any late-cycle gains.
Our outlook for the S&P 500 proved to be correct last year, with the index’s 21.8 percent gain fitting the pattern of the melt-up rallies that usually occur in a bull market’s latter innings.
Wrong on Volatility
The S&P 500 may have reached new highs in 2017, but our call for a bumpier ride couldn’t have been more wrong: The S&P 500 hasn’t experienced a correction of more than 5 percent since summer 2016—the longest uninterrupted rally in its history.
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Elliott and Roger on Dec. 31, 2019
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