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Mark Hulbert
June 25, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Is the past prologue?
We had better hope not, since the stock market over the first half of 2010 has been a disappointing performer -- falling far short of its long-term average pace of around 10% a year.
Following Thursday's decline of 146 points, for example, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,153, -145.64, -1.41%) is now down 2.6% for the year to date -- with just four more trading sessions left in 2010's first half. If the second half of the year is just as poor for the stock market, the full year will sport a loss of more than 5%.
Fortunately, a disappointing first half does not automatically doom the second half of the year.
A clue to this comes from just anecdotal evidence. Take 2009, for example, when the market lost ground for the first six months. Yet the second half of the year witnessed one of the strongest rallies in recent memory.
To be sure, poor first halves have not always been followed by such pleasing reversals. There have been plenty of other years in which poor first halves were followed by poor second halves as well.
But the historical record shows there is a largely random relationship between the market's performance in the first and second halves of each year.
To show this, I looked at the correlations between the stock market's first-half and second-half returns for all years since the Dow was created in the late 1800s. What I found appears in the accompanying table.
At first blush you might think that these results are impressive enough to support a bet that the second half of this year will be a below-average performer. But they are not; given the wide variability in the year-by-year results, the deviations from the overall average are not significant at the 95% confidence level that statisticians use to determine whether a pattern is genuine.
This finding should not come as a big surprise, given what Economics 101 teaches us about efficient markets. If it were the case that the market's return in the first half of a year were a reliable predictor of its return in the second half, then investors would rush into the market on June 30 to buy or sell, depending on the direction of the market's year-to-date return. Investors would soon learn that they could jump the gun by acting even earlier than June 30. Eventually the historic relationship would disappear.
Though some of you might find it disappointing that the first half of this year provides very little guide to the second half, it is in fact something to celebrate. That at least is the argument made by Lawrence Tint, chairman of Quantal International, a firm that conducts risk modeling for institutional investors. In an interview, he said that the market would be "subject to unnecessary and unhealthy turmoil" if the market's return in one period were correlated with its return in the previous period.
"We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns, and do not include history in the calculation," he added.
So, as you lay out your financial plans for the rest of 2010, make sure to keep things in perspective. And make sure you realize the consequences!
Stocks may still decline over the next six months. But if they do, that will have nothing to do with its poor performance so far this year.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
Research In Motion Ltd. reported big revenue growth of 24%, but it wasn't quite enough for Wall Street.
5:26 p.m. June 24, 2010 | Comments: 2
- theaccusersgift | 12:21 a.m. Today12:21 a.m. June 25, 2010
"Mark Hulbert: First half says little about second half http://on.mktw.net/b0yX5W" 11:46 p.m. EDT, June 24, 2010 from MktwHulbert
"Mark Hulbert: Contrarian take on gold's prospects http://on.mktw.net/90jFZe" 11:40 p.m. EDT, June 22, 2010 from MktwHulbert
"Mark Hulbert: Is a double-dip recession certain? http://on.mktw.net/d0cCwB" 11:46 p.m. EDT, June 21, 2010 from MktwHulbert
"Mark Hulbert: Dow Theory sees bull market near death http://on.mktw.net/cP4KGm" 11:41 p.m. EDT, June 15, 2010 from MktwHulbert
"Mark Hulbert: Are midterm elections bad for stocks? http://on.mktw.net/9DTB7p" 1:08 a.m. EDT, June 15, 2010 from MktwHulbert
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