Traders work on the floor at the New York Stock Exchange.
Brendan McDermid | Reuters
The S&P 500 is up more than 20% so far this year and if history is any gauge, this is bullish for stocks through year-end. A run of this magnitude also bodes well for 2020.
Tracking market returns back to the 1950s, when the S&P 500 is up 20% or more through October, as it is now, the average return through the rest of the year is more than 6%, according to Canaccord Genuity. This has happened 7 times and the median return is 5.92%. All 7 times led to gains the rest of the year.
Stocks are hitting record highs recently with the Dow Jones Industrial Average reaching an all-time record high on Monday, just a week after the S&P 500 hit its highest level ever. U.S.-China trade war optimism is helping boost equities as well as interest rate cuts from the Federal Reserve and better-than-expected earnings.
Canaccord Genuity said stocks keep ripping higher because historically low inflation gives the Fed more leeway for continued aggressive easing. Despite some overhang from trade and the steepness of the yield curve flashing recession signals, economic activity is strong which drives earnings, which ultimately rallies the market.
“Over the long-term, the equity market is most closely correlated to the direction of earnings. The continued positive trajectory of EPS and low inflation should cause a continued multiple expansion,” Canaccord Genuity analyst Tony Dwyer in a note to clients.
Dwyer also noted that any pullback in these periods of time, is minor. The average pullback from the end of October to year-end in these cases is a loss of 1.37% and the median is less than 1%.
“The message is clear – use any pullback as an opportunity to add exposure,” added Dwyer.
Cannacord also noted the returns of the S&P 500 the year after the October run-up and data shows 2020 could be a big year for equities. The average next-year return is 15.11% and the median return is 19.15%.
If historical data holds up here, investors are in for a solid rest of 2019 and a healthy rally in 2020.
—with reporting from CNBC’s Michael Bloom.