Chances are the US stock market will be higher in late December. Don’t be too excited; Those odds have nothing to do with how strong the US economy is now or the impressive returns in the stock market this year. In fact, even if stocks are in a bear market or the economy is in recession, the chance of winning would be the same in the second half of 2021.
The reason for this lies in the efficiency of the exchange. Its status at a certain point in time reflects all information available up to that point in time. For example, on June 30th, if the odds were better than usual that stocks would be higher in six months, traders would have already raised prices to account for those better odds. They wouldn’t wait until later in the year to raise their bets.
This also applies if the chances of a higher market are worse than usual. If traders knew by mid-year that the market was most likely going to be lower in six months, they would sell immediately instead of waiting.
The net result of their doing in both cases would be that the market’s chances of rising in the second half of the year are about the same. Those odds are 66.9% – roughly two out of three – based on the Dow Jones Industrial Average
DJIA, -0.21%
back to its creation in the late 1890s.
Note in the table below that these odds are largely the same regardless of what happened to the Dow through the middle of the year. In the calendar years when the Dow rose in the first six months, it rose 72.4% of the time in the second half. The increase from 66.9% to 72.4% is not significant at the 95% confidence level statisticians often use to determine whether a pattern is real.
Or take the first few years of the President’s four-year term, which is the year we are in now. In the second half of those years, the stock market rose 64.5% of the time. This is not statistically significantly different from the quotas that apply to all years.
You may be disappointed that a strong first half doesn’t increase the chances of a strong second half. However, just a year ago, no one complained when the identical statistical analysis suggested that there was a two-out-of-three chance the stock market would be higher by the end of 2020. In fact, it was like this: after falling 9.6% for the first half of last year, the Dow rose 18.6% in the second.
Because of the efficiency of the marketplace, a buy-and-hold strategy is so hard to beat in the long run. If you deviate from this buy-and-hold approach, you bet you know and have more insight than the collective wisdom of millions of other stock market investors. It is not out of the question that you will do this, but – as history has shown several times – it is a low probability bet.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert ratings track investment newsletters that pay a flat fee for testing. He can be reached at [email protected]
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