The quarter ending September 30 saw the Dow putting in its best quarter since 1998, up a solid ~15%.  I thought it would be useful to take a look at how markets do after big quarters.

With everyone waiting for a pullback, reviewing some history may be helpful. To do this, a table below indicates what has happened historically, after markets have put in record setting quarters of 15% or more.

Source: Barry Ritholtz, The Big Picture, October 2, 2009.

For the most part, momentum has trumped mean reversion historically. On average, we can see 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 that these record setting rallies, especially following big selloffs, are themselves a form of mean reversion.  One must remember that past performance is no guarantee of future performance, but it is interesting reading!

This article is for information purposes only. All performance data represents past performance and is not indicative of future performance. It is recommended that individuals consult with their Wealth Advisor before acting on any information contained in this article. ScotiaMcLeod does not offer tax advice, but working with our team of experts we are able to provide a suite of financial services for clients. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.