Why a Good First Half for Stocks Bodes Well for the Second Half
“Never put off till tomorrow what you can do the day after tomorrow.” — Mark Twain
- The S&P 500 finished the first half of the year with a 14.5% gain, 15.3% if you include dividends.
- A good first half historically has typically been followed by an above-average second half.
- The number of new all-time highs in the first half, the second best of the millennium, also signals a greater likelihood of above-average second half returns.
- The Supreme Court handed down a significant pro-business decision last week that may have a bigger long-term impact than the presidential debate.
- While the debate significantly increased the likelihood that President Biden will drop out of the race, it only slightly improved former President Trump’s odds of winning the election.
- Market reaction to the debate real time was positive.
The S&P 500 was up 14.5% the first half of the year, with the Dow up only 3.8%, but the tech-heavy NASDAQ up 18%. Be aware that none of these important indexes topped the first six months from last year. Digging in more, the Russell 2000 small cap index was up less than 2%, while many of the “Magnificent 7” large cap tech-oriented names continued to sport impressive gains.
According to Howard Silverblatt at S&P, if you removed NVIDIA’s gains the S&P 500 would be up 10.7% and if you removed all of the Magnificent 7, it would still be up 6.3%. Take note, the average return for first six months for the S&P 500 is 4.2%, so even taking out the big winners, this is still a really solid year.
What stands out? The persistent number of new highs for starters. Remember, all of 2022 and 2023 the S&P 500 made a grand total of one new all-time high. It has 31 the first six months of this year, which is second only to 2021 this millennium.
What does a lot of new highs mean? When the S&P 500 had 20 or more all-time highs at the midpoint, the rest of the year has always had at least one more new high and it averaged another 20 new highs the second half of the year. Turning to returns, the median rest-of-year return was a very impressive 9.6%, well above the median return for all years of 5.6%. To put a bow on it, a lot of new highs so far in 2024 could mean more fun for the bulls.
Lastly, turning to price returns, when the S&P 500 was up double digits at the midpoint of the year, the second half of the year again does better than most years. In fact, the full year has never been lower, with an average gain of 25% for the entire year, but given most of these years had huge head starts, that isn’t all that surprising. Still, the final six months have had a very impressive median gain of 9.8%, well above the returns from all years, and have been higher nearly 83% of the time.
There Was a Political Event Last Week That May Have Been Bigger Than the Debate
While the press coverage of Thursday’s presidential debate and its aftermath has been frenetic, there was another event that may carry more weight in the long run. In a 6-3 decision the Supreme Court overturned the 1984 decision Chevron v. Natural Resources Defense Council (“Chevron”). Chevron gave deference to government agencies in interpreting the laws they abide by within certain guidelines when the law was not clear. At the time Chevron was decided, it was not considered controversial. The decision was unanimous, with two justices not participating due to illness and Justice Sandra Day O’Connor recusing herself due to a conflict of interest.
The impact of Friday’s decision may be far reaching but it will be slow moving. Agency decisions must still be challenged through the court system, and the courts may still agree with agency interpretations. Nevertheless, the decision is likely to lead to a large number of new challenges to agency regulations resulting in a meaningful trend toward a looser regulatory environment. The irony is the original case was a win for the Reagan administration in its effort to reinterpret the Clean Air Act in a way that decreased regulatory burden. Be careful what you wish for.
Because the impact will be slow moving, markets did not react. And, of course, pundits may be wrong about the actual impact the decision may have. It could turn out that it gives a potentially liberal court scope to disagree with an agency’s interpretation of a law during a conservative administration. But a pro-business bias toward deregulation is the most likely outcome.
Markets Respond to the Debate
The first (and possibly only) presidential debate of the cycle, which took place last Thursday, is now in the rearview mirror and it’s still hard to gauge what the fallout will be when all is said and done. Two things to keep in mind: First, anyone who views the debate strictly from a policy perspective is going to think the candidate who represents their policy preferences won. Second, debates rarely have an impact on elections. But rarely doesn’t mean never and a few debates have had a meaningful impact. (1960 and 1980 are the most often cited.)
Even if debates usually have little impact, we have a nearly evenly divided electorate and this is likely to be another close election. A small impact may be enough to make a difference.
Thursday night former President Donald Trump did not so much win the debate as President Joe Biden lost it, at least based on post-debate polling and assessment of pundits and politicians on both the left and right, even if they may take a different angle. Despite a week of intensive preparation, President Biden faltered badly in the one place where he absolutely had to succeed: convincing swing voters that age-related decline did not disqualify him from occupying the highest office in the land. In fact, it was bad enough that the New York Time’s editorial board called for Biden to drop out of the race in their Sunday edition. (In response to the pressure on Biden, the Philadelphia Inquirer’s editorial board called for Trump to drop out. Touché. But even they acknowledged Biden had a horrible night.)
We were watching prediction markets debate night proceeded to gauge the reaction in real time. Take these numbers with a grain of salt. Prediction markets are often more a reflection of sentiment than they are predictive, but they give us a good ballpark estimate of shifting odds. Over the course of the evening, the likelihood of Biden being the Democratic nominee in November fell from an implied 86% to 61% on PredictIt and from 91% to 67% on Polymarket. As of Sunday night, those numbers are at 61% and 56% respectively.
Those are big moves, but let’s be careful about what it means. To the degree that it’s accurate, Biden is still more likely the Democratic nominee than not. He has the necessary delegates by an overwhelming margin so he can’t be pushed out. He has to choose to bow out. And he’s well known to be doggedly persistent in pursing his goals—it’s been part of the secret of his success. But the pressure for him to drop out is mounting.
Trump’s prospects of winning the election did not correspondingly rise much. On PredictIt, it only rose from 55% to 58% and on Polymarket from 61% to 64%. In the RealClearPolitics betting market average, which includes actual oddsmakers as well as the prediction markets, Trump rose from a 51% favorite to win the election to 55%. On Sunday evening it was back at 54%. Even these swings can be meaningful if they stick, but they are only a small change, roughly the equivalent of going from a 2-point favorite to a 2½-point favorite in a football game.
Why such a small swing? Even if Biden is now perceived to be a weaker candidate, if he does give up the nomination whoever replaces him will likely be a stronger candidate than Biden was even before the debate. The new candidate would likely have a similar overall policy profile but without the added baggage of age-related concerns. The main contenders right now are California governor Gavin Newsom and Vice President Kamala Harris with a lot of other names in the field.
There is another important prediction market out there that’s even more important to us as investors—the financial markets. S&P 500 futures spiked a small but meaningful 0.12% during the debate. Futures for the Russell 2000 Index of US small cap stocks moved a similar amount during the debate, but unlike the S&P 500 continued to climb overnight. Meanwhile, the 10-year Treasury yield initially climbed 0.03 percentage points during the debate.
We rarely get such a direct market reaction (or possibly overreaction) to an election event in real time. What does it tell us? Assuming the markets are directly reacting to the marginally increased likelihood of a Trump victory, a reasonable takeaway is markets believe tax cuts (deficits) and deregulation are stimulative near term, especially for small caps, but there is some inflationary risk from deficit-financed spending, tariffs, and the tighter labor market that comes with a highly restrictive immigration policy. It also tells us that markets had some concerns about Biden, although we don’t know if that’s because of his platform or just individual characteristics.
For those fascinated by political theater, there’s more to come as post-debate Democratic hand wringing is channeled into actual political pressure on Biden to drop out, but this will mostly take place behind the scenes. Additional pressure will come if the Biden campaign begins to face new fundraising challenges. As for Trump, he loves a good spectacle and knows how to exploit it, but it’s also important to remember that the post-debate response to his usual bluster and hyperbole was not well received by swing voters, even if his base loves it. He did not win the debate Thursday night as much as Biden lost it, giving what will likely be remembered as the worst performance in the history of televised presidential debates.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Russell 2000 – The Russell 2000 is a stock market index measuring the performance of 2000 small capitalization stocks. It represents the 2000 smallest companies in the Russell 3000 Index, which in turn represents the 3000 largest companies in the U.S. Thus, the Russell 2000 is a barometer of small-cap stocks. Though small, the companies represented by the Russell 2000 are not the smallest of the small as they are not penny stocks. The Russell 2000 is weighted by the market capitalization of the stocks.
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