Stocks made little noise during Monday’s holiday-shortened session.
Investors will return for a full day of trading on Wednesday and remain firmly focused on how the second half of 2023 will play out.
And people would be forgiven for expecting a bearish reversal in the coming months. But having ripped apart the outsized returns from the first and second quarters, our work shows that the tape clearly shows the story is with the bulls.
Looking back over the past 95 years of the history of the S&P 500 (^GSPC), first half returns have been positive in 61 years.
In 28 years — or nearly half that time — the index has posted double-digit percentage gains, including this year when the index rose 16% earlier in the year. And over those years, the second half averaged a 6% return, 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%.
S&P 500 is recovering after a 10% gain in the first half
If you only look at first half-year returns after a year of negative results – including this year – the odds are better.
Over those ten years, the average second-half return was 9.8%, the median return was 11.5%, the win ratio was 80%, and an enviable average Sharpe ratio of 1.82. This, of course, suggests that mean reversion is still alive, albeit on an annual rather than semi-annual timeframe.
The differentiated results presented here for the S&P 500 differ slightly from those we found for the Nasdaq Composite (^IXIC), which appears to have an aversion to results that are simply “too good.”
For the S&P 500, we found no significant differences when filtering by total positive days or total days above the 10-day moving average.
Nathan Ring (left), CFO of Knife River Corporation (NYSE: KNF), rings the bell on the floor of the New York Stock Exchange (NYSE) as the company goes public on June 1, 2023 in New York City. (Photo by Spencer Platt/Getty Images)
Still, the bottom line for investors is that the strength we’ve seen so far this year tends to breed even more strength. At least when it comes to the S&P 500.
Seasonal tailwinds can account for up to a third of an instrument’s returns, meaning that the ultimate direction of major indices is still largely based on current fundamentals.
The story goes on
Accordingly, we will continue to watch the Fed’s most popular economic reports and second quarter results this month with bated breath.
But those who ignore history, whether in the markets or otherwise, do so at their peril.
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