Written by Norman Isaac Mwambazi

Market history suggests stocks will keep climbing this year

If we borrow from physics to kick off this upbeat article, Newton’s first law of motion states that a body …

If we borrow from physics to kick off this upbeat article, Newton’s first law of motion states that a body in motion stays in motion unless acted upon by an outside force, and the reverse is true. Likewise, a market in motion, as has been in the first half of this year, tends to stay in motion, so analysts project the stock market to keep posting positive numbers in the last half of the year.

Recovering from the effects of the coronavirus pandemic that peaked last year, the U.S stock market has constantly been climbing in the past six months, putting a smile on the faces of both individual and institutional investors, as well as putting extra dollars in the bank for their investments.

By the close of yesterday’s trading session, the benchmark S&P 500 was up 16.1% year-to-date, while the tech-heavy Nasdaq and the Dow Jones Industrial Average (DJIA) were both up more than 12% in the same period.

However, analysts say that the gains at an index level are not conclusive indicators of how good or bad the market performs today, yesterday, or will do in the future. Index gains work hand in hand with a host of other factors like sectors and styles becoming favourable or otherwise to investors, which correct each other to give the complete outlook of the market.

Tony Dwyer, the Chief Market Strategist at Canaccord Genuity, while commenting on the performance of the market in the first half of the year, said that most institutional investors whose job is generally to pick stocks and lucrative sectors to invest in had been frustrated by volatility in the sector rotation of the stock market. This is contrary to the speed of recovery of the stock market after a slump, which individual or novice investors believe is more frustrating.

Dwyer explained that people who keep a keen eye on the stock market pay more attention to the S&P 500 and the Nasdaq Composite Index, which are currently exciting since they are hitting new highs. However, Dyer adds that most investors he has talked to about the market situation tell him that they have mixed feelings. It is mainly attributed to the rotation between growth and value stocks under the surface.

According to data on the Vanguard Growth Index ETF (VUG), growth stocks, just like their name suggests, have grown by around 10% in the last two months. On the other hand, data on the Vanguard Value Index ETF (VTV) that tracks the performance of value stocks shows that they have dropped by 1.5% in the same period. Still covering the period of the last two months, the S&P 500 has gained about 4.5%.

Industrials (XLI), the fund which exposes investors to the broad US industrial sector; Financial Select Sector SPDR Fund (XLF), and the Materials Select Sector SPDR Fund (XLB), which provides an adequate representation of the materials sector of the S&P 500 Index have all underperformed the S&P 500 since June.

All big tech companies have surged in the past six months in the tech sector, but June has been even better. Social media giant Facebook (ticker: FB), electronics and high-end devices maker Apple (ticker: AAPL), e-commerce and retail giant Amazon (ticker: AMZN), and software and hardware developer Microsoft (ticker: MSFT) have all registered 5% of record highs.

There has been a rally in government bonds in the first half of the year in the bond market, peaking at 1.75% before closing yesterday, Thursday, July 15, 2021, falling to 1.3%. This movement in the bond market helps form the base for this current market environment. Lower rates mean slower economic growth ahead, making investors focus on sectors like technology that have faster growth potential and turn a blind eye to sectors like financials and industrials, which are more sensitive to the economic cycle.

The rotation within the stock market has not only affected bonds, big tech, and funds, it has also hit notable pockets like Special-Purpose Acquisition Companies (SPACs), IPO debutants, and the meme stocks. During yesterday’s trading session, shares of meme stocks like theatre operator AMC Entertainment (ticker: AMC) and videogame vendor GameStop (ticker: GME) were trading at over 40% below the record highs they hit early last month.

It is worth noting that these two companies saw their stock surge to record highs early this year when individual traders fuelled by Reddit conversations ganged up and bought them in a move to revolt against Wall Street hedge funds and institutional investors. AMC and GME have gained more than 1,400% and 700 respectively year-to-date.

However, companies that have had their Initial Public Offering (IPO) debuts recently have underperformed compared to analysts’ expectations. Companies like cryptocurrency exchange operator Coinbase (ticker: COIN, IPO: April 2021), doughnut company and coffeehouse chain Krispy Kreme (ticker: DNUT, IPO: July 1), Swedish food company Oatly (ticker: OTLY, IPO: May 2021), and Chinese ride-hailing company Didi (ticker: DIDI, IPO: June 2021) have all had a subpar performance since going public.

With some companies underperforming in the past six months of 2021, the broad stock market has performed well, with numerous sectors exceeding Wall Street expectations. Historical data from Bespoke Investment Group suggests that this will continue throughout the next half of the year.

According to Bespoke, there tend to be further gains and limited downward movements in the stock market in years when the market performs exceedingly well in the first six months of the year.

To reach this conclusion, Bespoke looked at how the S&P 500 has performed each year since 1928 and focused on the 10 years with year-to-date figures that correlated the most to the way the first half of 2021 has performed. Bespoke says that according to their market data, the market has gained 16.2% in the first half of 2021, which is close to their analysed 10 years’ magnitude of the gains. In these similar years analysed by Bespoke, the average gain for the S&P 500 through July 14 was 20.1%, with a median return of 18.8%.

“Therefore, during years in which the market has gone up with the force we’ve seen so far is 2021, the S&P 500 through the balance of the year tends to deliver stronger-than-normal returns as well,” Bespoke noted.

As the possibility of further gains looks higher to Bespoke, they also noted that in the 10 years analysed, two years featured a market downturn of over 10%, signalling a median correction of a 2.3% drop. All in all, the market looks to gain further in the next six months, and with limited volatility, if the Bespoke analysis is anything to go by.