The first half of 2023 has been marked by a remarkable bullish run in the US equity market, despite facing numerous challenges such as banking sector upheaval and economic concerns. The Nasdaq Composite, driven by the excitement around AI software and central bank interest-rate hikes, achieved its best opening six months in four decades.
Similarly, the S&P 500 also surged by 15.9%, with technology stocks playing a pivotal role in driving the rally, while the DJIA lagged behind.
As we look ahead to the second half of the year, historical data indicates that this bullish momentum might continue. The S&P 500 has shown an average increase of 8% in the second half since 1945 when it experienced a gain of at least 10% in the first half.
Drawing parallels with 1929, where the S&P 500 climbed an average of 4.3% in the second half after rising at least 14% in the initial six months, further strengthens the case for continued positive momentum.
However, several factors come into play in the second half, such as the likelihood of a recession, fluctuating interest rates, and the state of the global economy. While a recession in 2023 appears less likely, economic concerns still persist, as indicated by the New York Federal Reserve’s prediction of a 71% risk of recession in the next 12 months based on the Treasury yield curve.
Meanwhile, the global economy also faces uncertainties, with China reporting second-quarter GDP growth of 6.3%, falling short of analysts’ expectations. While headline inflation seems to have peaked among the G20 countries, core inflation remains higher than the central banks’ target levels, particularly in advanced economies.
In the light of historical market trends, it can be worth it for an investor to prepare for potential pullbacks or corrections in the second half. Past data shows that,since 1950, the average maximum downside for the S&P 500 in a calendar year has been ‑13.8%, which is lower than this year’s current maximum drawdown of negative 7.8%.
Moreover, positive gains in the first half have historically resulted in shorter second-half drawdowns, adding a positive outlook for the market’s performance.
Despite these optimistic projections, caution is advised in terms of the technology industry, which is now considered to be in “overvalued territory.” Mega-cap($200B+ Market Cap) technology stocks might have reached their peak, prompting investors to review their portfolios and reallocate assets that may have become overextended.
According to Jeffrey A. Hirsch’s theory from the Stock Trader’s Almanac, the stock market’s performance often follows a pattern corresponding to a four-year presidential term. While the third year of a presidential cycle typically sees the best performance, the outlook for equities now appears even more promising.
In a 2019 interview with The Wall Street Journal, Jeffrey Hirsch, son of the presidential election cycle theory’s architect and the editor of the Stock Trader’s Almanac, indicated that the model still holds merit, especially when it comes to the third year of the term. “You have a president campaigning from a bully pulpit, pushing to stay in office, and that tends to drive the market up,” he told the newspaper.