What Follows Record Setting Dow Quarters?

With futures deep in the red, let’s take a contrary look at how markets do after big quarters. The quarter ending 9/30 saw the Dow putting in its best Q since ‘98, up a solid ~15%.

With everyone waiting for a pullback, and yesterday and today viewed as the probable start, perhaps its time to review some history. What has happened historically after markets have put in record setting quarters — 15%plus?

For the most part, momentum has trumped mean reversion historically. Jim Bianco crunched the numbers, and he found that “stocks returned an average of 1.33% over the month following one of these record quarters, 3.46% over the following quarter, and 9.95% over the following year.”

It is worth noting that these average returns following quarters of 15%+ performance are nothing out of the ordinary. The average monthly return over all periods in the DJIA since 1900 is 0.58%, the average quarterly return is 1.66%, and the average yearly return is 6.90%. If anything, the average returns following huge quarterly gains actually outpace the average returns during all periods.

Perhaps another way to look at it is these record setting rallies, especially following a a big selloffs, are themselves a form of mean reversion.

Here’s the tabel of past 15% quarters:

record dow Qs

courtesy of Bianco Research

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