Chart of the Week: Market Responses to Outstanding Months

Chart of the Week: Market Responses to Outstanding Months

Vanguard’s 500 Index fund (a proxy for the S&P 500 index, since you can’t invest directly in an index) gained 9.2% in July—the fund’s 13th best month since its 1976 inception.

Given that the S&P 500 fell more than 20% in the first half of the year, the market was probably “due” for a bounce. Now that we’ve gotten a nice rebound, investors may be wondering what’s next. Those who held cash on the sidelines may be worrying, “Have I missed out?” Others may wonder, “Is an outsized month of gains an opportunity to sell?” The short answer to both questions is no.

Here’s why I’m unequivocal on the topic: I identified the strongest months in the market since 500 Index’s inception and looked at how the fund fared over the year following each. On average, the index posted a 15% return following the best months compared to a 13% average return in all 12-month periods from 1976 on.

The takeaway is simple: A strong month in the market isn’t a good reason to avoid the market going forward.

Note: Chart shows the 15 best single-month total returns for Vanguard 500 Index since its 1976 inception, ranked in descending order from left to right. It also shows the 12-month return following each of those months for which data is available. Sources: Adviser Investments, Vanguard.

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