Despite multiple challenges, including the upheaval in the banking sector and ongoing concerns about the state of the economy, the equity market has surged higher in the first half of this year. The US stock market experienced a strong first half, with the Nasdaq Composite posting its best opening six months in four decades. The rally, driven by mega-cap technology shares, was driven by the excitement around AI software and central bank interest-rate hikes. The S&P 500 also surged 15.9% in H1 2023, with technology stocks driving most of the rally, while the DJIA fell behind.
In the second half, if history is any indication, stocks may benefit from their good start. According to Sam Stovall, chief investment strategist at CFRA, the S&P 500 has increased by an average of 8% in the second half of the year since 1945, when it increased by at least 10% in the first half.
The US stock market’s bullish momentum in the first half could continue into the second half, as was seen in 1929 when the S&P 500 index climbed an average of 4.3% in the second half after rising at least 14% in the first six months. From October lows, the indices have rallied into the bull market, up by almost 20%. In October 2022, the market was trading at a 23% discount to a composite of Morningstar’s fundamental stock valuations, a level not seen since 2010.
Factors playing out in H2 are recession, interest rates, and the global economy. Although a recession is currently thought to be less likely to occur this year, economic worries still exist. A 71% risk of a recession in the coming 12 months was predicted by a New York Federal Reserve model of recession probability based on the Treasury yield curve earlier this month.
The second-largest economy in the world, China, announced second-quarter GDP growth of 6.3%, which was less than analysts had anticipated.
According to the International Monetary Fund, headline inflation appears to have peaked among the Group of 20 countries. Core inflation, however, continues to be significantly higher than the central banks’ goal levels in the majority of G20 nations, especially the advanced economies.
Bull markets do not follow a straight line. Pullbacks, and possibly a correction, are to be expected in the second half. Since 1950, the average maximum downside for the S&P 500 during a calendar year has been minus 13.8%, which is significantly lower than this year’s current maximum drawdown of negative 7.8%.
Furthermore, historically, positive first-half S&P 500 gains have resulted in shorter second-half drawdowns. For example, the average second-half maximum drawdown after a positive first half is negative 9%, as opposed to an average drawdown of negative 13.1% when the first half was negative, according to data compiled by LPL Financial.
The technology industry has reached “overvalued territory” in terms of valuation, and these megacap technology stocks “have already run their course.” Now is a good time to take a look at your portfolio and reallocate those assets that are overextended.
According to a theory put forth by Yale Hirsch of the Stock Trader’s Almanac, the stock market exhibits a pattern that corresponds with a four-year presidential term. While typically the third year of a presidential cycle has seen the best performance of all four, the future for equities now appears even more promising.
Source: Financial Express
