For U.S. equities and specifically for the S&P 500, July 2013 is shaping up to be the best trading month since January 2013, and potentially since December 2011. The S&P 500 has appreciated 4.9% during July 2013 to date, level with the 5.0% gain in January of this year. The year 2012 did not feature any 5%-plus months. December 2011 finished with an 11.2% gain, a monthly performance that is likely to stand alone for some time to come.
As a reminder, July has been an atrocious market month. On the S&P 500 since 1980, July has been down in 19 years and up in 14 years, for a puny 42% win rate. Despite the worst winning percentage of any month, July has averaged positive appreciation on the S&P 500 since 1980. That is mainly because July performance in positive years tends to be very positive, including 7%-plus gains in 1997, 2009, and 2010. July 2013 will go in the books as one of those big winners.
As every investor knows, July falls squarely in the middle of "Sell in May and go away" season. We have documented that summer stock money is indeed idle, with the four-month change between the beginning of June and the end of September averaging 1.0% appreciation on the S&P 500 since 1980. By contrast, the 12-month change on the S&P 500 since 1980 has averaged 9.5% - in line with the long-term Lipper average for stock-market appreciation.
When July is positive, the market is usually in a pretty good mood. We took a look at July performance since 1980; culled the positive years; and measured full-year market performance in those years with winning months of July. As noted, July itself has averaged 0.72% appreciation since 1980. If we include only winning months, positive July months have averaged 5.2% appreciation. Again as noted, the S&P 500 has averaged 9.5% appreciation since 1980. If we include only those 14 years since 1980 in which July was positive, the S&P 500 has averaged much better 17.3% capital appreciation on an annual basis.
2Q Earnings Season Trend-Tracker
Since 2000, second-quarter earnings growth has averaged 8.2% on a year-over-year basis. This aggregates a far-from-stable trend. Second-quarter EPS averaged a 20% plus decline in 2008-09, followed by 30%-plus growth for 2010-11.
After 21% growth in 2Q11 EPS, second-quarter growth slumped to 1.2% in 2Q12. For 2Q13 to date, and based on 277 (55%) of the S&P 500 having reported calendar 2Q13 results, second-quarter earnings growth is running at 6.9%; we think it finishes with about 5% growth.
This period represents a challenging market environment, in which "Sell in May" is possibly overshadowed by the lure of beach, barbecue and ball games. Coming in the heart of vacation season for much of the public (Wall Street waits for mid-August to take off), 2Q earnings results fight not only the seasonal trend but investor apathy.
How does the market respond to 2Q earnings? Given our relentless and some would say obsessive focus on earnings, we measure stock performance across a 30-day span straddling mid-July to mid-August; we think this period better captures the market's immediate response to breaking EPS news. Specifically, we measure market performance between July 15 and August 15, which captures 90% of the second-quarter earnings reporting season.
Judging by market performance, we would say that the S&P has not known what to make of 2Q earnings season. Since 1980, the S&P 500 has averaged a 0.1% decline between July 15 and August 15. In 17 years, the market rose across this span; in 16 years, it declined. Looking at the more manageable period beginning with the millennial turn, we get similar stasis. In the July 15 through August 15 periods since 2000, the market averaged 0.1% decline, with six up and six down years.
We come to the same conclusion - that EPS and stock movements are not aligned - when we combine 2Q earnings growth data with stock performance data across the mid-month-to-month "straddle" period. For the 2000 to 2012 period, we pulled out the six positive stock market performances in the July 15 - August 15 straddle period; these six periods averaged 4.1% appreciation across the 30 days.
Were these periods of stellar stock performances the result of and the reward for strong EPS growth? Hardly. EPS growth for the second quarters attached to these straddle periods averaged a paltry 1.6%. This is explained by the fact that over short periods, the market - characterized by anticipatory impulses and delayed responses - is not always aligned with the prevailing earnings trend.
We would like to think strong EPS performance is immediately and consistently rewarded in the stock market. The reality is more complicated. But we do see that when investors push the market higher in what is normally the market's worst month, the full-year performance tends to be better than average. We are expecting a strong second-half earnings trend against easy comparisons from 1H12. The combination of market optimism and EPS momentum should drive further gains in the S&P 500 across the back half of 2013.