- When the S&P 500 is up 20% or more through October, as it is now, the average return through the rest of the year is more than 6%, according to Canaccord Genuity.
- History also shows any pullbacks are minor and should have been bought.
- Despite some overhang from trade and the steepness of the yield curve flashing recession signals, economic activity is strong, and that drives earnings and market rallies, the firm says.
The S&P 500 is up more than 20% this year, and if history is any gauge, this is bullish for stocks through year-end. A run of this magnitude also bodes well for 2020.
When the S&P 500 is up 20% or more through October, as it is now, the average return through the rest of the year is more than 6%, according to Canaccord Genuity, which tracked market returns back to the 1950s. This has happened seven times in that period. The median return was 5.92% and all seven times led to gains the rest of the year.
Stocks are hitting record highs recently with the Dow Jones Industrial Average reaching an all-time record high on Monday, just a week after the S&P 500 hit its highest level ever. Equities are getting boosts from optimism about the U.S.-China trade war, Federal Reserve cuts in interest rates, and better-than-expected earnings.
Canaccord Genuity said stocks keep ripping higher because historically low inflation gives the Fed more leeway for continued aggressive easing. Despite some overhang from trade and the steepness of the yield curve flashing recession signals, economic activity is strong, and that drives earnings and rallies the market.
"Over the long-term, the equity market is most closely correlated to the direction of earnings. The continued positive trajectory of EPS and low inflation should cause a continued multiple expansion," Canaccord Genuity analyst Tony Dwyer said in a note to clients.
Dwyer also noted that any pullback in these periods of time is minor. The average pullback from the end of October to year-end in these cases was a loss of 1.37% and the median was less than 1%.
"The message is clear — use any pullback as an opportunity to add exposure," added Dwyer.
Canaccord also noted that the returns of the S&P 500 the year after the October run-up shows 2020 could be a big year for equities. The average next-year return is 15.11% and the median return is 19.15%.
If historical data holds up here, investors are in for a solid year-end and a healthy rally in 2020.
—with reporting from CNBC's Michael Bloom.