Stocks made little noise in a shortened session on Monday.
Investors will return on Wednesday for a full day of trading with their still firm focus on how the second half of 2023 unfolds.
And people would be forgiven for expecting a bearish middle reversal in the coming months. But after slicing and dicing the outsized first and second quarter returns, our work shows the tape clearly showing that the story is with the bulls.
Looking back over the previous 95 years of S&P 500 (^GSPC) history, in 61 years, first-half returns have been positive.
In 28 years – almost half the time – the index has posted double-digit percentage gains, including this year which saw the index rise 16% to start the year. And in those years, the second half averaged 6% with a 75% win rate and an average Sharpe ratio of 0.87. The median return after those years was a more robust 9.7%.
Looking only at returns for the first six months after a year of negative results – which includes this year – improves the odds.
Over those ten years, the average second-half return was 9.8%, the median return 11.5%, the success rate 80%, and an enviable average Sharpe ratio of 1.82. Of course, this suggests that mean reversion is alive and well, but on an annual rather than semiannual basis.
The nuanced results for the S&P 500 shown here are a little different from those we found for the Nasdaq Composite (^IXIC), which seems to have an aversion to results that are just “too good.”
With the S&P 500, we did not find any significant edges when filtering out the total number of positive days or the total number of days above the 10-day moving average.
Still, the bottom line for investors is that the strength we’ve seen so far this year tends to breed more strength. At least as far as the S&P 500 is concerned.
Seasonal tailwinds can account for up to a third of an instrument’s returns, meaning the ultimate direction of major indices is still largely based on fundamentals of the day.
Accordingly, we will continue to watch the Fed’s favorite economic reports and second quarter results this month with anticipation.
But those who ignore history, in the markets or otherwise, do so at their peril.
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