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There’s a 67.7% probability that the U.S. stock market will rise over the second half of 2023.
That’s the conclusion I reached when comparing this year to all prior calendar years since the Dow Jones Industrial Average
DJIA,
was created in 1896. I focused on those years in which valuation indicators showed the market to be as overvalued as it is today, for example. I also focused on years like this one — in which the market rose for the first half of the year, it’s the third year of the U.S. presidential term, inflation’s 12-month rate of change is lower than a year earlier, and the Treasury’s 10-year yield is higher than a year earlier.
What I found is plotted in the chart below. I could have saved myself all the work: None of these variables made a significant difference to the market’s odds of rising over the second half of 2023, which remained statistically indistinguishable from two-out-of-three in all cases.
The odds were identical a year ago, when the stock market was sporting a big year-to-date loss, inflation was higher, interest rates were lower and it was the second year of the presidential term. The Dow rose 7.7% over the subsequent six months.
Odds that never change might strike you as boring, but they actually are worth celebrating. One of the hallmarks of market efficiency is that markets “base their level on anticipated future returns, and do not include history in the calculation,” Lawrence Tint told me in an interview. Tint is the former U.S. CEO of Barclays Global Investors, the organization that created iShares (now part of Blackrock). Tint added that the markets would be “subject to unnecessary and unhealthy turmoil” if returns in one period were correlated with returns in the previous period.
To appreciate how this efficiency works in practice, imagine a world in which a market gain in the first half of the year significantly increased the odds of it rising in the second half as well. In that event, traders would jump the gun — buying stocks whenever it became clear that the market would close out June higher than where it was at the start of the year. Their purchases would drive the stock market higher until the odds of a second-half increase were no better than average.
Equilibrium is restored at whatever price level translates to the odds of a rising market that are just high enough to entice investors to incur the risk of a decline. Stock market history teaches us that, for any six-month period, those equilibrium odds are close to two-out-of-three. That equilibrium is what the accompanying chart documents.
So by all means celebrate the odds the market will be higher at the end of this year than it is today. Just be clear what in fact you’re celebrating.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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