Blistering stock returns in the first half of 2023 have sparked optimism among investors, who are now eagerly anticipating a strong second half. Despite concerns of a potential bearish reversal, historical data suggests that the bulls may still have the upper hand.
Analyzing the past 95 years of the S&P 500’s performance, it becomes clear that positive returns in the first half of the year have often been followed by further gains in the second half. Out of these 61 years, nearly half saw double-digit percentage gains, including this year’s impressive 16% rise. On average, the second half of these years delivered a 6% return with a win rate of 75% and a respectable Sharpe ratio of 0.87. The median return after such positive first halves stood at an even more robust 9.7%.
Looking specifically at years following negative results, which includes the current year, increases the likelihood of a strong second half. In these ten years, the average return for the second half was 9.8%, the median return was 11.5%, the win rate stood at an impressive 80%, and the average Sharpe ratio was a remarkable 1.82. These results suggest that mean reversion occurs on an annual rather than semi-annual timeframe.
While these findings primarily apply to the S&P 500, the Nasdaq Composite presents a somewhat different picture. There are no significant advantages to be gained by filtering for positive days or days above the 10-day moving average.
Ultimately, this data highlights that the strength observed in the stock market during the first half of the year tends to reinforce further strength. However, it is important to recognize that seasonal tailwinds only account for approximately one-third of an instrument’s returns. The ultimate trajectory of major indices still heavily depends on the prevailing fundamentals.
As we move forward, investors will closely monitor the Federal Reserve’s favored economic reports and second-quarter earnings, eagerly seeking clues about the market’s future direction.
It is crucial to heed the lessons of history, both in markets and in life. Ignoring historical patterns can lead to perilous consequences. Therefore, investors should stay informed, seek balanced perspectives, and leverage the insights garnered from past trends to navigate the evolving market landscape.
