Over the past 125 years, while the Dow Jones Industrial Average rose in the first half of the year, it rose 72.4% of the time in the second half.
Great news everyone! The stock market is likely to go up in the second half of 2021.
Over the past 125 years, while the Dow Jones Industrial Average (DJIA) rose in the first half of the year, it rose 72.4% of the time in the second half. That’s more than 66.9% of the time, it’s usually in the second half. The Dow Jones is up 64.5% of the time in the second half of a president’s first year.
If you can’t capture it in my writing, there is sarcasm in my jubilation. But, yeah, I guess that’s not bad news, so maybe that makes it good news. What I mean is not that historical trends are favorable, but that they are not head winds.
I am always looking for a reason to bail out my stock positions. I don’t want to waste my money. However, because the stock market has risen so much since the start of the year, that is not reason enough for me to use the adage âwhat goes up must come downâ. History marks us as relatively safe. Everything else doesn’t, but history does.
What doesn’t mark us safe? Well, I’m afraid that economic growth will peak in a month or two. I don’t expect anything negative, but I would say the stock market has incorporated a lot of good news. Since mid-April, the market has mostly turned awry; I’m not picking up anything the market hasn’t already considered. What happens now that the stock market has consolidated? I remain invested. There is a chance of an upward resolution. And I think the risk is limited to a single digit correction in the second half of the year. I suspect that a correction would be undone by the end of the year, which would make it a year-end like many others.
Although the risk is relatively limited, I don’t expect much of a market gain for the next 6 to 12 months. It’s overrated. Of course, it was also overvalued in 1996 when then Federal Reserve Chairman Alan Greenspan said the stock market was in “irrational exuberance.” He was right about the sentiment, but that didn’t stop the stock market from rising wildly over the next few years.
Basically, it is irrational of me to expect much more earnings from the stock market. But neither is it prudent to fight an accommodating Fed or the massive amount of fiscal stimulus that remains in the economy. And that might not be the wisest plan to tackle the exuberant investors throwing money into a hot market for Meme stocks and cryptocurrency.
So I’m going to stay invested, but I’m going to keep looking for reasons to get out of Dodge. Or Doge, as the case may be.
To a certain perspective, my expectation for a single digit decline is somewhat optimistic. The 2020 stock market decline was followed by a massive rally. It is not unusual. Typically, the stock market will hit its low a few months before a recession ends and then recover. In the second year of economic expansion, investors begin to integrate slower growth rates. This transition can be tricky. So far, the transfer has resulted in two and a half months of side action. However, according to Ned Davis Research (NDR), it’s generally worse. Over the past 60 years, these transfers have evolved into what NDR calls âecho bearsâ. Echo Bears cause the S&P 500 to experience a median decline of 18.0% over 6.8 months.
Here. One hundred and twenty-five years of history indicates that the odds are that the stock market will be up the rest of the year. But suppose these months are part of the second year of an economic expansion. In this case, it is not unlikely to expect a drop of 18.0%. I remain invested in the stock market, but you can see why I am nervous about this.
However, you shouldn’t be nervous about a single digit sale. According to Cornerstone Macro, since the March 2020 low of COVID-19, there have been six sales of more than 5% with an average decline of 7.8%. My prediction sounds lazy, but that doesn’t mean it’s not a high probability. It’s a garden variety sale and that’s to be expected.
When will it start? I think there’s a good chance he already has. On Friday, June 18, 2021, the percentage of stocks trading above their 50-day moving average (DMA) fell to 44.0%, from 68.1% two weeks earlier. Measuring the performance of stocks within an index is called tracking its “breadth.” Not all stocks go up or down at the same time. An index may continue to rise as fewer and fewer stocks in that index participate in the rally. However, at any given time, enough individual stocks fall to bring down the entire index. This could be the start of a 7.8% drop that we will all forget by the end of the year. After all, how many of us remembered that there had been six declines of 5% and more in the past fifteen months? I’m not sure the exact timing of a drop, but I’m convinced it’s not enough to motivate me to try and avoid it.
I’m looking for reasons to go out, but I can’t. A decrease of 7.8% is ordinary. The moment is impossible to know for sure. And there is still a possibility that it will go up from here. I just can’t find enough evidence to press this sell trigger. Again. But if we get a resolution to the upside, it might justify defensive moves in anticipation of a larger decline.
What could cause a bigger drop? The Fed may decide to shift to a more hawkish stance just as economic growth peaks. It is common for the stock market to react negatively when the Fed shifts from loose monetary policy to restrictive policy, making interest rates a headwind rather than a tailwind. This would increase the chances of matching this median drop of 18.0% over 6.8 months. The market is so richly valued that a decline of this magnitude could take longer than usual to recover. But for now, the problem for the market is that asset prices are overvalued and not a serious fundamental problem. My basic scenario is that the next drop isn’t the âbig one,â but I have my finger on the trigger to sell if the information changes quickly.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing investments of over $ 500 million. Unless specifically identified as original research or data collection, some or all of the data cited is attributable to third party sources. Unless otherwise indicated, any mention of specific securities or investments is for illustrative purposes only. The clients of the Advisor may or may not hold the securities that are the subject of their portfolios. The Advisor makes no representation that any of the securities mentioned have been or will be profitable. Full disclosures. Direct requests: firstname.lastname@example.org. Is Bitcoin’s Collapse Warning Us To Exit The Stock Market?