Executive Edge

Why the Dow rally won't stop now, based on recent market history

Key Points
  • The Dow has posted a three-week rally 40 times in the past decade, and in close to 70% of those instances, the next month included more gains.
  • Historically, June has not been a good month for the Dow or S&P 500.
  • In past periods when the Dow has been this strong, stock momentum has tended to last for months.

In this article

Why Dow may extend rally into the summer months

The pressure is on the bears to prove they have not been wrong all along about the market comeback after the March coronavirus crash. Stocks are up close to 50% since the March 23 bottom, and recent trading history in the Dow Jones Industrial Average suggests the job for the skeptics may not get any easier this month. 

The Dow just had a huge week, capped by Friday's surprise jobs number, and passed its 200-day moving average for the first time since February, before Covid-19 sank stocks. Last week also marked the first time since December of last year that the Dow notched positive gains for three straight weeks. Similar three-week Dow runs have occurred 40 times in the past decade, and the history shows that the short-term equities momentum often continues.

In the month following three-week Dow rallies, the U.S. stock market index posted an average gain of 0.89% and traded positive 67% of the time, according to data from hedge fund information platform Kensho. The S&P 500 Index posted an average return of 0.81%, trading positive 70% of the time.

In the past decade, three-week Dow rallies are more likely to sustain stock market momentum than exhaust it.

Many investors already may be looking beyond the summer — and looking at recent signs of a quicker than expected economic rebound and V-shaped recovery — as reason to be more positive on the market over the next 12 to 18 months. 

For investors concerned about stocks losing steam in the near term, June's history of recent returns is a reason to worry. Since 2000, both U.S. equity indexes have posted an average return that is negative during the first month of summer, positive less than half of the time in June across the past two decades, according to Kensho data. The Dow's average return in June has been negative 1.03% (–1.03%), while the S&P 500 has declined on average by 0.74 (–0.74%). 

Trading on Monday started with the market up at the open, with some of the stocks hit hardest by the pandemic moving higher, including transportation, retail and cruise line companies. 

"What is clearly happening is the excitement of reopening is allowing a lot of these companies that have been casualties of Covid to come back and come back in force, " said Stanley Druckenmiller, chairman and CEO of the Duquesne Family Office, on CNBC's "Squawk Box." "With a combination of the Fed money and, in particular, a vaccine where the news has been very, very good," the legendary hedge fund manager, who has been bearish on the market in recent weeks, said he has been "humbled. 

Mohamed El-Erian, the chief economic advisor at Allianz, told "Squawk Box" on Monday he is "uncomfortable" continuing to bet on a huge recovery in stocks, but acknowledged that the decision is one each investor has to make for their own reasons and based on their own situation and, so far, it's been the right one. 

"The narrative has been win-win" in the stock market, El-Erian said. "You win if you look through all the bad data and bet on a massive recovery. And you still win because the Fed will support you all the time. That narrative is so deeply embedded now that it takes a major shock to change it."

The positive skew in the Dow three-week rally data could help add bullish momentum to the market during the full summer as well. After weakness in June, U.S. stocks do tend to have positive, but muted, returns in longer summer trading periods that include July and August, according to Kensho.

Since 2000, both the Dow and S&P have eked out average returns that are positive in the two-month and three-month summer periods beginning after Memorial Day. Both indexes are up, on average, by 0.53% in the June-July stretch. In the three-month period including August, the Dow has posted a modest average return of 0.23%, and S&P an average return of 0.37%.

The Dow and S&P have posted higher average returns than is typical for the summer in one-, two- and three-month periods after three-week ralles in the DJIA.

Since 2010, after a three-week rally in the Dow, average returns posted by U.S. stocks tend to increase in the following months.