Blistering share returns this year provide the basis for a strong second half of the year
Shares made little noise during a holiday-shortened session on Monday.
Investors will return for a full day of trading on Wednesday with continued focus on how the second half of 2023 will unfold.
And people would be forgiven for expecting some bearish mean reversion in the months ahead. But after slicing and slicing the big returns from the first and second quarters, our work shows that the band that clearly shows the story is with the bulls.
Looking back at the previous 95 years of history for the S&P 500 (^GSPC), in 61 years the return in the first half was positive.
In 28 years ̵[ads1]1; or almost half of that time – the index posted double-digit percentage gains, including this year which saw the index rise 16% to start the year. And in those years, second half returns averaged 6% with a 75% win rate and an average Sharpe ratio of 0.87. The median return after these years was a more robust 9.7%.
Looking only at the first six months of returns after a year of negative results – which includes this year – improves the odds.
In those ten years, the average second-half return was 9.8%, the median return 11.5%, the win rate 80% and an enviable average Sharpe ratio of 1.82. Of course, this suggests that reversion is alive and well, but on an annual rather than semi-annual time frame.
The nuanced results for the S&P 500 presented here are slightly different than those we found for the Nasdaq Composite (^IXIC), which appears to have an aversion to results that are simply “too good.”
With the S&P 500, we did not find significant benefits from filtering for the total number of positive days or total 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 when it comes to the S&P 500.
Seasonal tailwinds can account for up to a third of an instrument’s return, meaning the ultimate direction of major indexes remains overwhelmingly based on fundamentals. of today.
Accordingly, we will continue to follow the Fed’s favorite economic reports and second quarter earnings this month with bated breath.
But those who ignore history, in markets or otherwise, do so at their peril.
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