The second-half setup for stocks: Don't fight the tape but keep expectations in check

Published Sat, Jun 26 20218:41 AM EDT

Through nearly half the year, 2021 has delivered investors about three times more reward than risk, the S & P 500's 14% return coming with a few brief declines of no more than 5%. In markets as in sports, momentum and mean-reversion are always either in force or in reserve, and a win streak reliably spurs a debate over whether a team has built unbeatable chemistry or is "due" for a rough patch. When it comes to stocks, the prevailing trend usually gets the benefit of the doubt. And last week the steady uptrend was defended, as investors collectively concluded the little shakeout from a subtle shift in Fed messaging and a purge of crowded "reflation" trades was unwarranted given all that had not changed about the benign backdrop, as hinted here a week ago . History offers some comfort to the bulls about strength often begetting strength. In the 17 prior years since 1950 when the S & P 500's total return in the first half exceeded 12%, the index continued higher in all but four in the second half, according to Schaeffer's Investment Research. The average second-half return for all those years was 7%. Only once in the four losing years – the notorious boom-and-crash episode of 1987 – did the market give up a significant slug of the first-half gains. So the broad tendencies point higher, though one of the current quibbles with the market's latest push higher is that it hasn't been impressively broad. In fact, last week the S & P 500 made a new record high while fewer than half the index's stocks were even above their individual 50-day moving average, a rare condition of internal disagreement. According to the research service SentimenTrader, this has only happened six times before since 1928, most either in the later, more volatile phases of bull markets or, a couple of times, at significant peaks. That's too small a sample to infer future direction with confidence. And it's a bit of a quirk of the market itself having flattened out quite a bit since mid-April, from which point the S & P is up just over 2%. But if nothing else suggests a more selective tape than has been the case since last fall. Resilient market Speaking of small samples and the market flattening out: The current snapshot of the current 90% rally from the March 2020 low compared to the only two comparable bull-market launch phases is showing a pretty wide divergence in recent months. This chart led to many calls for a downward choppy phase starting in the spring, but, so far, the market has been resilient. It's not too hard to imagine why the ramp since the Covid crash has outdone those earlier celebrated rallies, but some 30 percentage points: The uniquely compressed nature of the economic crunch last year, the almost immediate and overw