Market halftime report

07/01/20
  • S&P 500 down YTD at mid-year for first time since 2010
  • Broad market staring at 50-50 odds for remainder of year?
  • The tech exception: NDX’s YTD gain is larger than average

In light of the coronavirus-fueled storm the market weathered in February and March, the fact that the S&P 500 (SPX) is still in negative territory for the year shouldn’t be too surprising.

It shouldn’t be too discouraging for bulls, either—after all, the SPX has trimmed its year-to-date (YTD) loss from -31% on March 23 to only -4.0% as of yesterday, and even after a June slump the index is still much closer to its all-time high than its March low.

That said, the SPX’s performance over the past six decades suggests a negative first six months hasn’t typically paved the way for a big second-half rally—but it hasn’t signaled doom and gloom, either.

The fact is, negative first halves haven’t happened all that often. Here’s the rundown:

1. The SPX has had a negative YTD return at the end of June only 20 other times since 1960.

2. The index gained ground in the remaining six months of the year 10 times, and lost ground in the other 10.

The following chart compares the SPX’s median July-December return in the 20 years the index was in negative territory at end of June (left) to its return in the 40 years it was in positive territory (right):

Chart 1: S&P 500 (SPX) median July–Dec. returns, 1960–2019. S&P 500 (SPX) first half performance. Q1 and Q2.

Source: Power E*TRADE


The median July–December return when the SPX was in the red at the end of June was -1.6%, although there was a wide range of individual returns—in 1982 the SPX rallied 28% in the last six months of the year, while in 2008 it fell 29%. By comparison, when the index was up at the midpoint of the year, it gained ground in July–December 31 out of 40 years (78% of the time) with a median return of 6.3%.1

Sure, investors may not be thrilled by the the prospect of a market that (based on this historical script) appears to have a 50-50 chance of being higher at the end of the year than it is now, but the odds could certainly be worse, all things considered. Also, traders know the market can take many twists and turns on its way to going “nowhere” over a six-month period—in other words, there’s likely to be plenty of tradeable price swings between now and then, even if 2020 turns out to be a “flat” year overall.

And don’t forget, this year has been a Tale of Two Markets—tech, and everything else. The Nasdaq 100’s (NDX) +16.3% YTD return through June was actually the tech index’s 13th-best first six months since 1986, and in the 18 other years it had a 10% or larger first-half return, it gained even more ground in July–December 13 times, with a median return of +9.4%.2

Of course, 2020 has been exceptional, and evolving “events on the ground” will likely determine whether the market follows or diverges from its historical norms the remainder of the year. Even if the coronavirus recedes as a market-moving factor (don’t hold your breath), this fall’s presidential election would likely ratchet up the market’s uncertainty factor.

In which case, traders looking for outperformance may be focusing even more on specific sectors, industries, and stocks that are tuned into the market’s current realities.

Today’s numbers (all times ET): ADP Employment Change (8:15 a.m.), Construction Spending (10 a.m.), ISM Manufacturing Index (10 a.m.), EIA Crude Oil Inventories (10:30 a.m.), Vehicle Sales.

Today’s earnings include: Constellation Brands (STZ), Huazhu Group (HTHT), General Mills (GIS), Macy's (M).

 

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1 Reflects S&P 500 (SPX) monthly closing prices, 1960–2019. Supporting document available upon request.

 

2 Reflects Nasdaq 100 (NDX) monthly closing prices, 1986–2019. Supporting document available upon request.

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