Mirror, Mirror – What will the rest of the year bring for investors?

Just over a month has passed since the surprising Brexit vote, and if you blinked or missed that event, the S&P 500 at this point (July 25) is up almost 6% for the year.  The summer is half over, and so is the fiscal year, so some commentators are starting to predict the next half of the year.

We would rather remind our readers that heading into the Brexit vote, the night before (June 23) the S&P 500 closed for the year, up a modest 3.40% thus far.  After the overnight results from the historical unofficial British referendum were broadcasted globally, the world stock markets all experienced sell-offs.   For the S&P 500, the next two trading sessions saw the index shed -5.33%.  Yet from those levels, the S&P 500 had experienced a significant bounce, and at this point (July 26) the S&P 500 is now up almost 6% for the year. 

Long-time investors know that this one number, in no way describes the type of year it has been for those long this benchmark. 2016 started out with the worst start to a year in the S&P 500’s history and finished the first half with a rebound of near historic proportions.  2016 has really seen it all – and that was just what happened in the first quarter!   

While some of the extreme moves we have witnessed are unprecedented, and no two years are ever the same, for those that love data as much as we do, there are similarities between any given year and all other years.

We periodically look back in the rear-view mirror and run an analysis of past years where the S&P 500 results resemble the current landscape. This, in financial market jargon, is called correlation. The table below shows the top ten years since 1928 where the S&P 500 has had the highest correlation to the results experienced so far in 2016.

For each previous year in the charts, we list the correlation of closing prices for the S&P 500 YTD through 7/26, how the S&P 500 performed YTD through 7/26, and then how the index performed over the remainder of the year, including maximum gains and losses from the 7/26 closing level.

S&P 500 – Past Years Most Similar to 2016

Source: VIP Wealth Solutions and Bloomberg

Looking at the data presented in this chart, it is interesting to note that every other year in this chart with similar correlation saw greater gains than the gains experienced so far in 2016.  

If one was to use this data and model a crystal ball, going forward, the return expectation for the S&P 500 bodes well for the rest of the year.  

For example, the average rest-of-year return during these past years was 4.9% (median: +4.6%), which incidentally is nearly double the return for all years in the index’s history.   In these ten years, the S&P 500 was also only down in the second half, on two occurrences.  In terms of the maximum gain and loss for these ten prior years, the average maximum gain was 6.9% (median: +7.3%) and the average maximum drawdown was 6.2% (median: -5.4%).  While the average maximum gain was smaller than average, so too was the average maximum drawdown.  

Thus based on prior years where the S&P 500’s pattern was similar to 2016, the odds favour better than average returns for the remainder of the year, if one remains long in this benchmark.

 

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