Investing In Stocks In The First Half Stunk; Will H2 Be Better?

With the first half of 2022 closing today and the major stock market indexes wallowing near or in bear market territory, it’s natural to wonder if the second half will bring more of the same or a big fat rally. Is it time to be investing in stocks?


With the Dow Jones Industrial Average as of Wednesday’s close down 15%, the S&P 500 off 20% and the Nasdaq composite down 29%, it would be nice to know if it’s time to jump back in and start investing in stocks for a nice ride back up. Unfortunately, neither the calendar or history offer much guidance on whether we’re in for a second-half gain or more pain. Based on the evidence, any rally will happen in its own time.

The S&P 500’s H1 decline is the worst since the first half of 1970, when the index fell 21%. And the H1 decline is the third worst in S&P Dow Jones Indices Hall of Infamy going back to 1957, as the accompanying table shows.

What’s more, through Wednesday — one day to go to the end of the month — the S&P 500 was down 7.58%, the worst June to invest in stocks since 2008’s 8.8% decline, according to S&P Dow Jones Indices.

Time To Invest In Stocks?

S&P 500 returnsThat being said, historically there has been little to no correlation between the S&P 500’s performance in the first and the second half of the year, notes Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices.

Looking at data going back to March 31, 1957, she notes that in 1970 — a year with similar declines to this year — the S&P 500 lost 21% in H1. That was followed by a gain of 27% in H2. Those ups and downs led to a gain of just 0.1% for the full year.

The temptation is to think that if you can escape the bulk of a sharp decline in the first half and then just invest in stocks on July 1, you’ll be fine. That’s worked in some cases.

Nasdaq Composite

Dow Jones Market Data looked at how the major stock indexes performed in the second half after big declines in the first half.

Below is the Nasdaq composite’s second-half performance when the index is down at least 20% in the first half:

Year 2nd Half % Change 2002 -8.73 1973 -8.70 Average -8.72 Median -8.72 S&P 500

The picture looks much brighter for the S&P 500 when looking at its second-half performance when the index is down at least 15% in the first half. The index produced gains in all five instances. Note that these data sets go back to the Great Depression.

Year 2nd Half % Change 1970 26.51 1962 15.25 1940 6.01 1939 15.01 1932 55.53 Average 23.66 Median 15.25

The Dow Jones Industrial Average also has produced positive results for stock investing most of the time when looking at second-half performance after the index declines at least 10% in the first half. Of 15 instances of such first-half declines in the Dow going back to 1900, 10 were followed by second-half gains, and five were followed by H2 declines. The worst second-half Dow drop since 1970 was 22.68% in 2008. With positive second-half results 66.7% of the time, the average gain was 4.45%, while the median was 6.99%.

So how do you use this information to make money in the stock market? Is it time to invest in stocks? IBD founder William O’Neil found little evidence that investing strictly by the calendar would produce results, but he did advise that long-term investors in diversified mutual funds should start adding to their portfolios any time the market is in bear market territory.

Why? Because every bear market has reliably been followed by a bull market. Diversified stock funds are the one time you don’t have to so exact on entering the market. With individual stocks, of course, investing in stocks only when the market is in a confirmed uptrend works best.

S&P Dow Jones’ Ganti agrees that there’s little evidence that investing in stocks based on calendar dates will produce good results. But she notes that periods of great volatility, as we’ve seen this year, can bring opportunities for active traders.

Big swings in sectors, in investing factors like growth vs. value, and in asset classes can allow skilled investors to gain an advantage over buy-and-hold investors, she says. Staying alert for a big swing in the relative performance of growth and value stocks could yield results.

Invest In Stocks: Growth Vs. Value

Through Tuesday, the S&P 500 Value Index outperformed the S&P 500 Growth Index by 14.83 percentage points. That’s its largest first-half outperformance on record going back to 1994. S&P 500 Value was down 13% for the year through Tuesday.

At that level it would be the worst first half since 2020, when it fell 16.8% in the first six months of the year, notes Dow Jones Market Data. And it’s on pace for its third-worst first-half performance on record.

That looks bad, but not so bad when compared with the S&P 500 Growth Index. It was down 27.8% through Tuesday, surpassing the worst first half since 1994 by more than 10 percentage points.

The same pattern can be seen in small-stock investing. The Russell 2000 Value Index is outperforming the Russell 2000 Growth Index by 13.28 percentage points, its largest first-half outperformance since 2021. The Russell 2000 Value Index was down 17.9% for the first half through Tuesday.

That would be the worst first half since H1 2020, when it fell 24.4%. Even worse, the Russell 2000 Growth Index was down 31.2%. At that level it would be the worst first half on record, exceeding the next worst of 17.5%.


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