This is your time machine: Stock markets in the second half of the year

By Kim Iskyan

History is no prologue, but for stock markets, past performance often gives us clues about the future.

We've written before about the "January barometer", the notion that stock market performance in January foreshadows market performance for the full year.

So if stock markets are up in January, there's a good chance they'll end the year in the black. And if they're down in January, there's a good chance they'll be down over the year as a whole.

We extended this analysis to see whether over the past 30 years, stock market performance during the first half of the year (rather than for only January) presaged full-year performance.

What does a good/bad first-half market performance mean?

As shown below, a positive first-half performance very frequently was followed by a positive second-half market performance.

For Singapore and Hong Kong, a positive first half has been followed by double-digit returns during the second half of the year three-quarters of the time. For the MSCI World and MSCI Asia ex Japan Indexes, the returns in the second half - following a positive first half - were also positive. Perhaps most notably, the MSCI World Index had a significant 85.7 percent conversion rate (that is, like a "prediction rate") from first half to second half - so if the first half of the year was strong, the chances are high that the second half will be too.

Similarly, a negative return during the first half of the year was most of the time followed by a negative second-half return.

In two of the five indices (Singapore and the MSCI World) we looked at, negative returns in the first half of the year have usually been followed by negative returns in the second half of the year. However, negative returns in the first half of the year meant nothing at all for two indices… and for the MSCI Asia ex Japan index, a downbeat first half has more often been followed by a positive return in the second half of the year.

So, what does this portend for markets for the rest of 2018?

The graph below shows how these markets have performed so far this year. As you can see, Hong Kong, the MSCI Asia ex Japan and Singapore have all seen negative returns so far this year. And the S&P 500 and MSCI World have returned 2.6 percent and 0.3 percent, respectively.

Based on what's happened in the past, that means we'll likely see negative returns in the Singapore market for the second half of the year. Sixty percent of the time in Singapore, when the stock market saw negative returns during the first half of the year, they were followed by negative returns during the second half of the year. For Hong Kong, when the market has also fallen over the first half of the year, chances are even that the second half of the year will be in the red.

History suggests that the MSCI Asia ex Japan Index may post a positive return for the second half of the year. Most of the time over the past 30 years, a down first half was followed by a positive return in the second half.

And positive returns in the first half - even if just barely - for the S&P 500 and the MSCI World suggests positive returns for the second half of the year.

Of course, the past has no bearing on the present. Market history - particularly with small sample sizes - doesn't presage future market movements. Additionally, if the current market correction in Asia continues (and if U.S. President Donald Trump continues his efforts to choke off global trade), markets could be in unusual territory.

 

Kim Iskyan
Kim Iskyan is the publisher of Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Kim has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets. He's been quoted in the Economist, The New York Times, the Wall Street Journal, Barron's, and Bloomberg, and has appeared on Fox Business News, China Central Television, and Bloomberg TV, and has written commentary for the Wall Street Journal, Slate.com, Salon, TheStreet.com, breakingviews.com, and other publications. For more of his insights, Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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