Brad here. One of the things I have learned is that while history doesn’t necessarily repeat itself, it does rhyme—even in the financial markets. My colleague, Tom Logue, is a student of how the market behaves. Here, he lays out some reasons for optimism as we enter the fall. Thanks, Tom, and I hope you are right!
As we look back over the past seven months of 2023, we see the market has continued to shine in the face of hurdles and walls of worry. Through June, the S&P 500 had grown almost 16 percent since the start of the year. That is one of the best first-half starts by the S&P 500 in its history. When we examine similar occurrences, where the index grew between 10 percent and 20 percent throughout the first six months of the year, the rest of the year also looked promising.
Now that we’ve moved past July, these trends are appearing even more hopeful or, rather, less bumpy. Let's delve deeper to understand the outlook better.
Strong Starts Through the Years
Since 1950, there have been 21 times when the S&P 500 grew more than 10 percent, but less than 20 percent, in the first half of the year. Disregarding July’s performance, in each of these occurrences, the S&P 500 continued to expand from the end of July through December, recording an average return of 7.38 percent. Among these 21 instances, the S&P 500 contracted in 7 of them during July. Interestingly, in 5 of these 7 times (representing 71.4 percent of these cases), the S&P 500 saw a decline in August, with an average decrease of 4.15 percent.
August Declines in Perspective
Digging further into those seven cases, we notice that the average drawdown in August (the lowest price in August versus the highest price in July) was 9.31 percent. In particular, 1998 and 1999 experienced double-digit drawdowns, with 1998 witnessing a staggering August decline of 19.58 percent. Despite these falls, all seven cases still saw an overall rise from July’s closing price to December’s closing price, with an average return of 5.85 percent.
Furthermore, between August’s lowest price and the highest price between September and December, the average return was 14.1 percent. This also includes a huge 30 percent bounce-back in 1998.
Favorable July Performance
For 2023, like the 13 other recorded instances, July was a favorable month for the S&P 500. In these 13 instances, the preceding August month saw a decrease seven times (53.8 percent of the time), with an average drop of 2.3 percent. The average drawdown in August (relative to July’s highest price) averaged 4 percent, with 2019 seeing the biggest fall of 6.8 percent. But, as with the other 7 cases, all 13 of these cases experienced growth from July’s end through December, with an average rise of 8.21 percent.
In 9 of these 13 years, the S&P 500 generated a return greater than 7 percent from July’s end to December’s end. In addition, between August’s lowest price and the highest price between September and December, the average return came in at 12.3 percent. Lastly, except for 2003, the S&P 500 hit a new record high by year’s end in every case.
Strong Rebound Ahead?
We are now 15 days into August and the S&P 500 has thus far experienced a 3.54 percent drawdown, which is right around that 4 percent average mentioned above. We may experience a further drawdown throughout the remainder of August, but history still suggests a strong rebound from here headed into the end of the year.