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  • Kyle Johnston

After Back-to-Back Quarters of Double-Digit Returns, Has the Market Gone Too Far, Too Fast?



With strong returns in February and March, the first quarter of 2024 marked the first time since 2011 that the S&P 500 has had consecutive double-digit return quarters. In fact, before this year, this had only happened 12 times since the 1930’s. At first glance, such a statistic may cause many investors to worry that the market is getting overheated. To be honest, our first impression was that this could be a negative signal for forward returns. We took to historical data analysis to investigate what this has meant for prospective returns in the past.


After breaking down the data, 2 consecutive quarters of double-digit returns for the S&P has been anything but a bearish indicator. Looking at the previous 12 occurrences, only once was the forward 5-year annualized return less than 8% per year following the end of the second double-digit quarter. The median forward 3-, 5-, and 10-year annual returns for this sample were all above 13%. Even short-term forward returns tended to be strong.


*Data from Morningstar, analysis by 1620 Investment Advisors, Inc.


However, 12 events is still a small sample size and one should examine the periods in question a bit closer. When looking at what happened leading up to the high return quarters, 8 of the 12 observations came at the end of a decade of poor returns. The median trailing 3-, 5-, and 10-year annualized returns for these periods were -0.9%, 3.75%, and 5.6% (see below table). Such performance is far from stellar. As you can see, the most recent period is an outlier with trailing 1-, 3-, 5- and 10-year returns of about 22%, 10%, 10%, and 12%.


*Data from Morningstar, analysis by 1620 Investment Advisors, Inc. Data begins in 1936 so trailing 10 year return not available for the 1942 instance. Periods with strong trailing returns are highlighted in green.


On the other hand, 3 of the periods (1954, 1958, and 1985) did come after strong 10-year annual returns (median of 14.9%), although 2 of these came only a few years apart. Zooming out further, these 3 instances came during extended recoveries from some of the worst three-month drawdowns in stock market history. The 1954 and 1958 periods came about 8 and 12 years after the -18% drawdown of 1946. The 1985 period came about 11 years after the -25% drawdown of 1974 (the second worst on record). The most recent period came about 15 years after the worst 3-month drawdown of all-time, -30%, in late 2008. For reference, the average and median returns for negative quarters since 1936 have been -6.6% and -4.4% with only 30% of quarters produced negative returns.


It is possible that the consecutive double-digit return quarters that have come after strong trailing returns are simply part of larger bull markets that began following historically severe market drawdowns. Stock market cycles often last for 10 to 20 years. In the grand scheme of things, a sample of 2 or 3 similar periods is far from being statistically significant. The rising interest rate environment, persistent inflation, concentration of the S&P in a handful of companies, and recent valuation multiple expansion of the current period could combine to produce forward returns that may not live up to the comparative periods we have examined in this piece. In general, this analysis has us feeling optimistic on prospective returns for stocks, but also cautious given the conditions described above and the outlier nature of the current period.

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