By: Gary Droz
There’s little doubt among industry experts that the equities markets have soared in the first half of 2017. This analysis is hard to miss, given that all the “talking heads” are being asked, and are answering, the same question, now that the third quarter is underway: “what’s in store for the markets in the second half of 2017?”
After flipping through various news channels and reading countless online and print articles a day, a common theme emerges from the market “experts” that are currently in the public’s eye: are the gains that equities enjoyed in the first half of 2017 over and will stocks cool down in the second half of the year?
While this is a valid question, and one that might be important to investors in the short-term, the answer to what lies ahead is actually a pretty simple one to figure out, despite what you might be hearing on your television or reading in your daily news mash-up. In our view, total market value (as reflected by the S&P 500) will likely remain strong in the second half of 2017 for two reasons: (1) because of the historical data for the S&P and (2) based on simple arithmetic.
First, let’s examine the data. By June 30, 2017 the S&P 500 was up 9% year to date. At that point, we were all saying what a great year it has been thus far, but how will the year finish? The better question might be, do the next six months matter as much as the first half did? If you go all the way back to the inception of the S&P 500 in 1957, there have been twenty-five years where the index was up 9% or more. How many of those years finished in the negative? None. While we know that historical data cannot predict future returns, the data does present a very persuasive perspective. In my opinion, it seems highly unlikely that the year will finish in the red. While there are always factors that might create totally unforeseen anomalies, the data still strongly supports the likelihood of a positive year overall.
Now, let’s focus on a more important question, which we aren’t seeing the industry “experts” cover more broadly: if it’s going to be positive, how high can it go? In our view, of the 25 years that have provided returns of 9% or higher, most ended with a year-end return in the mid-teens to mid-twenties. Of those 25 years, there was only one year that ended in a single digit positive return. It’s especially relevant because that was the crash of 1987.
Here are the surprising stats:
First half of the year: ↑ 27.4%
Crash (10/19/87): ↓ 23%
Second half of the year: ↓ 17.4%
Year End: ↑ 5.3%
Finally, outside of the 1987 crash, the S&P 500 has only had two other years where the second half has been negative after a first half with returns above 9%. How did those years end up? In 1975 it finished at 37.5% and in 1986 at 19.7%.
So, our conclusion is pretty simple – historical data and arithmetic show us that the first half of the year creates a “cushion” to allow a drawdown to occur without wiping out the return for the year. Based on this it seems likely that the year will be a good one, even if a drawdown does occur. Let’s hope that the historical data prevails.
All investors should understand that even though historical performance is often used as a measure to model return expectations, past performance is never a guarantee of future results. Investing in securities involves risk, including the possible loss of principal. Projections regarding the likelihood of market outcomes are hypothetical in nature, and do not reflect actual investment results. You cannot invest directly in an index, like the S&P 500. S&P returns are reflective of the reinvestment of dividends and earnings.