Thursday, June 29, 2023
- Most major averages are coming into the second half with some impressive returns. History suggests the momentum could continue.
- Since 1950, the S&P 500 has followed up a positive first half with an average second half gain of 6.0%. Furthermore, when first half gains were 10% or higher, the index posted average gains of 7.7% in the second half, with 82% of occurrences producing positive results.
- Despite the bullish inclinations from a positive first half, bull markets are not linear, and pullbacks or even a correction should be expected in the second half. The average maximum drawdown for the S&P 500 during any calendar year dating back to 1950 has been -13.8%, well below this year’s current maximum drawdown of only -7.8%.
- Given the performance gap between the Russell 1000 Growth and Value indexes this year, many investors are asking if and when value will start catching up to growth. Since 1979, when growth outperformed value in the first half, it historically outperformed again in the second half. However, when the growth-value spread exceeded 5%, as it is now, value modestly outperformed growth in the second half.
Climbing the Wall of Worry
To say stocks have had an impressive first half is an understatement. The S&P 500 shrugged off rising recession alarms, elevated inflation, global monetary policy tightening, including 75 basis points of additional rate hikes from the Federal Reserve (Fed), and the collapse of three major U.S. regional banks. As shown in the chart below, most major U.S. indices climbed the wall of worry and are wrapping up the first half with some impressive gains.
The NASDAQ Composite Index is leading the way, with a first half advance of 29.9% as of June 28, marking its third-best first half since its inception in 1971. Large caps and growth have been major drivers of first half performance, evidenced by the 26.3% gain on the Russell 1000 Growth Index, a 24.1% delta over the Russell 1000 Value Index. The S&P 500 has added 14.0%, nearly matching its first half 2021 gain of 14.4% (for reference, the index advanced 10.9% during the second half of 2021).
Given the vast disparity in performance between the Russell 1000 Growth and Value indexes this year, many investors are asking if and when value will start catching up to growth. Since 1979, whenever growth outperformed value in the first half, it historically outperformed again in the second half. However, when the growth-value spread exceeded 5% in the first half, as it is now, value modestly outperformed growth in the second half.
Well Begun is Half-Done
As the proverb goes, “Well begun is half done,” and the market’s bullish first half momentum could spill over into the second half—at least that’s what history suggests. Since 1950, the S&P 500 has followed up a positive first half with an average second half gain of 6.0%. Furthermore, when first half gains were 10% or higher, the index posted average gains of 7.7% in the second half, with 82% of occurrences producing positive results.
As we pointed out in our latest Weekly Market Commentary, bull markets are not linear. Pullbacks and even a potential correction should be expected in the second half. This is not a bold call but a reflection of history. Since 1950, the average maximum drawdown for the S&P 500 during a calendar year has been -13.8%, well below this year’s current maximum drawdown of only -7.8%.
Positive first half S&P 500 returns have historically led to shallower second half drawdowns. As shown below, the average second half maximum drawdown after a positive first half is -9.0%, as opposed to an average drawdown of -13.1% when the first half was negative.
Stocks are off to an impressive start this year, and history suggests the bullish momentum could continue into the second half. However, expect some bumps along the way as the market faces headwinds from additional global monetary policy tightening, including the prospect of further rate hikes from the Fed, stubbornly high inflation, interest rate volatility, and elevated recession risk. The good news is that 1) drawdowns in the second half tend to be shallower after a positive first half, and 2) a pullback in stocks could provide investors who missed the first half rally a buying opportunity into this new bull market.
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