Think you've missed the stock-market rally since ‘liberation day'? Think again.

Despite the S&P 500's 25% rally since early April, new Clearbridge research suggests investors may not have missed out. Analyzing 10 historical instances of 20%+ S&P 500 gains within 50 days, the study found the index typically continued to rise, averaging 6.4% over the next three months and 16.4% over twelve months, with losses being rare and minimal. While current valuations are high and past performance is not a guarantee, this historical analysis challenges the common apprehension about entering the market after rapid advances.

Analysis

The market is grappling with investor sentiment following a significant rally where the S&P 500 has appreciated 25% since its early April lows. This rapid advance has created apprehension, with many investors questioning if it is too late to participate. However, a historical analysis from Clearbridge offers a bullish quantitative perspective. The study identified 10 previous instances since 1950 where the S&P 500 rose by 20% or more within a 50-day period. In the aftermath of these surges, the index, on average, continued to climb, posting gains of 6.4% over the subsequent three months and 16.4% over twelve months. Negative returns were rare in the year following such rallies, with only one instance resulting in a loss of 8.3% due to the 1987 crash. While this historical precedent is encouraging, it is contrasted by the current market environment where the S&P 500 is trading at historically high valuation metrics. The article suggests that investors could mitigate this valuation risk by considering other market segments, such as U.S. mid-cap (S&P 400), small-cap (S&P 600), and international stocks, which are noted to be cheaper relative to corporate earnings and dividends.

Key Decisions for Investors

• Given the historical data suggesting strong market performance often follows rapid rallies, investors on the sidelines should weigh the significant opportunity cost of not being invested.
• Investors should acknowledge the noted risk of high valuations in U.S. large-cap stocks and consider that past performance is not a guarantee of future results.
• To balance participation with valuation concerns, it may be prudent to diversify into relatively cheaper asset classes mentioned, such as U.S. mid-cap, small-cap, or international equities.