Here Is Why the S&P 500 Looks Poised to End the Year in Positive Territory
History sometimes repeats itself, and sometimes it rhymes.
With stock markets, past performance is no guarantee of anything, but looking at historical trends can still help.
For example, the January effect holds that stock market performance during that month gives a pretty good indication of how markets are likely to perform for the remainder of the year.
If January ends on a high note, expect a positive year. On the other hand, if stocks fall in January, there is a good chance that the year will end with a loss.
Does the same trend hold for the first half of the year, rather than for only January.
In other words, if the first half is positive, will the second half be positive? Or if the first half is negative, what will happen in the second half?
It turns out that there is a correlation between returns in the first and second half of the year. We looked at stock market returns from the past 25 years for Asian, U.S. and global markets (past 16 years for Singapore) and found that performance in the first half gives a good indication about the second half.
Here is a look at the performance of five of the indexes we looked at in the second half after the first half posted positive returns:
For all the markets we looked at, a first half during which markets were up was followed by a positive second half the majority of the time. For Hong Kong and Singapore, a positive first half often led to average returns of more than 10% in the second half.
And here is a look at performance in years when first half returns were negative:
Again, what happens in the first half is often repeated in the second half. Only the MSCI Asia ex Japan Index has shown a less-than-even chance of having a negative second half if the first half was also negative.
This first half/second half effect is most prominent in Singapore, where a positive first half has been followed by a positive second half 88% of the time, while a negative first half led to a negative second half 75% of the time.
This is over the years and across geographies. Data from 25 years seem to indicate that the first half has a clear correlation with the second half, and those invested in the first half this year may already know what this means.
It is good news for the S&P 500 but not so much for the MSCI World and Asian indexes. So far this year, the S&P 500 is slightly positive, while MSCI World is down by more than 2%, Hong Kong is off 5% and Singapore has slipped 1%.
The S&P 500 has had a positive second half 82% of the time that the first half was positive. Meanwhile, MSCI World has had a negative second half 57% of the time that the first half was negative.
Singapore has seen the same thing happen 75% of the time, so things may not improve for Singapore this year. Or things just might get better for Singapore, for several good reasons.
Of course, the performance this year for all these markets has been pretty flat, rather than overwhelmingly negative or positive, and the past is never a flawless indicator. But, those who think that this correlation has some merit might consider this a helpful piece of information while picking investments for the rest of the year.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the investments mentioned.