Bumper gains augur well for stocks

Stock markets tumbled last week following hawkish noises from the US Federal Reserve, but investors can’t complain given the returns enjoyed in the first half of 2023. The S&P 500′s 15.9 per cent gain was the second best first-half performance in the last two decades, notes Schwab’s Liz Ann Sonders. Technology investors had it even better, with the Nasdaq 100 soaring 38.8 per cent – a record first-half performance.

Despite last week’s reversal history suggests momentum will carry indices higher in the second half of the year. Since 1945 the S&P 500 has averaged gains of 4.2 per cent in the second half of the year, according to CFRA analysis, rising 69 per cent of the time. However, the results are much better following double-digit first-half gains, with the index averaging gains of 8 per cent and rising 82 per cent of the time.

Furthermore, Bank of America data shows when strong first-half gains follow a down year – the S&P 500 fell 20 per cent in 2022 – stocks continued to advance in the second half 86 per cent of the time, with returns averaging 11.1 per cent.

Of course this doesn’t mean the next six months will be plain sailing. Even in good years stocks can suffer nerve-jangling drawdowns. Still, the data is also promising here, says LPL Financial, with strong first-half returns associated with shallower second-half drawdowns.

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Some investors instinctively take a what-goes-up-must-come-down view at times like this. History suggests the opposite is true – market momentum is bullish, not bearish.