July is shaping up to be the hottest performing month for the stock market, with all three major US indices rising north of 6 percent month-to-date.  How will this trend continue for the rest of the year?

July Performance vs. Q3 Performance

With one trading day to go in the month, the markets are still faring well for July. The Dow is up 7.1%, the S&P is up 6.9%, and the Nasdaq is up 6.8% month-to date.

The current July gains could bode well for the markets’ third quarter performance. Essentially, a July gain has often translated into a Q3 gain for the markets:

• Since 1929, the Dow has posted a July gain 50 times. During those instances, the Dow has also finished the quarter with a gain 76% of the time (38 times total)
• Since 1951, the S&P has posted a July gain 31 times. During those instances, the S&P has also finished the quarter with a gain 84% of the time (26 times total)
• Since 1972, the Nasdaq has posted a July gain 19 times. During those instances, the Nasdaq has also finished the quarter with a gain 89% of the time (17 times total).

Keep in mind, according to the Stock Trader’s Almanac, July is typically the best month of the third quarter for the Dow & S&P. (Dow up 1.0% in July vs. up 0.01% in August and down 1.0% in September; S&P up 0.8% in July vs. up 0.1% in August and down 0.7% in September)

Year-to-date (YTD) performance at the end of July vs. end-of-year performance

Despite the solid July gains, the major indices are currently still teetering around the breakeven point for the year. So far this year, the Dow is up 0.4%, the S&P 500 is down 1.2%, and the Nasdaq is down 0.8%.

But what does the current YTD performance indicate about the markets down the road – let’s say at the end of the year?

In fact, a strong correlation exists when comparing the direction of the markets’ year-to date performance at the end of July to the direction of the markets’ performance at the end of the year (i.e., if the index was up YTD at the end of July, it was also up at end of the year –or- if the index was down YTD at the end of July, it was also down at the end of the year):

• Since 1929, 83% of the time, the direction of the Dow’s calendar year performance has been the same as the direction of its YTD performance at the end of July
• Since 1951, 90% of the time, the direction of the S&P’s calendar year performance has been the same as the direction of its YTD performance at the end of July
• Since 1972, 84% of the time, the direction of the Nasdaq’s calendar year performance has been the same as the direction of its YTD performance at the end of July

Here’s a breakdown of the correlation in the years that the indexes are up YTD at the end of July vs. when they are down YTD at the end of July:

For year-to-date gains at the end of July:

• Since 1929, when the Dow has finished July up YTD, it also ended the full year with a gain 87% of the time
• Since 1951, when the S&P has finished July up YTD, it also ended the full year with a gain 95% of the time
• Since 1972, when the Nasdaq has finished July up YTD, it also ended the full year with a gain 92% of the time.

For year-to-date declines at the end of July:

• Since 1929, when the Dow has finished July down YTD, it also ended the full year with a decline 75% of the time
• Since 1951, when the S&P has finished July down YTD, it also ended the full year with a decline 78% of the time
• Since 1972, when the Nasdaq has finished July down YTD, it also ended the full year with a decline 69% of the time.

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