Market history suggests stocks will keep climbing this year

·Head of News

Fri, Jul 16, 2021, 2:02 AM4 min read

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Friday, July 16, 2021

A market in motion tends to stay in motion

It's already been a strong year for the U.S. stock market.

Through Thursday's close, the S&P 500 (^GSPC) is up 16.1% year-to-date, while the Dow (^DJI) and Nasdaq (^IXIC) are both up more than 12%.

But index-level gains, of course, don't tell the full story of what's happening in the market, today or otherwise. As Canaccord Genuity strategist Tony Dwyer told Yahoo Finance Live earlier this week, what we've seen underneath the surface of indexes hitting record highs is a rolling correction with factors, sectors, and styles moving in and out of favor.

"Most institutional investors...in general try to pick stocks and sectors," Dwyer told Yahoo Finance. "It's what they're paid to do. The frustration hasn't been the speed of the recovery in the markets, it's been the volatility in the sector rotation in the markets."

Dwyer added: "People that watch the markets, they pay attention to the S&P 500, they pay attention to NASDAQ, they're at new highs, it feels so exciting. But under the surface, most investors that I talk to, their guts are churning, which is why it's a summer of indigestion, because it's very hard to get a real theme, because of the rotation between growth and value under the surface."

Growth stocks, as measured by the Vanguard Growth Index ETF (VUG), have gained around 10% in the last two months, while the Vanguard Value Index ETF (VTV) is down 1.5% over that period; the S&P 500 has gained about 4.5% in that time.

Industrials (XLI), Materials (XLB), and Financials (XLF) have all underperformed the S&P 500 since June. Facebook (FB), Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT) are all within 5% of record highs.

The rally we've seen in the bond market — where the 10-year Treasury yield has gone from around 1.75% to under 1.3% on Thursday — helps form the base for this current market environment. All else equal, lower rates suggest slower economic growth ahead; they also lead investors to favor faster growing sectors like technology over sectors more sensitive to the economic cycle, like financials and industrials.

This rotation within the market has also hit notable pockets of froth like SPACs, new issues, and the meme trade. Through Thursday's trading session, shares of AMC (AMC) and GameStop (GME) were more than 40% below highs hit back in early June. Shares of the two companies have gained, of course, more than 1,400% and 700%, respectively, year-to-date. Recent new issues like Coinbase (COIN), Krispy Kreme (DNUT), Oatly (OTLY), and Didi (DIDI) have also traded unenthusiastically since going public.

But data from Bespoke Investment Group suggests that history is very much on the market's side this year. In years when the market acts this well in the first six months of the year, we tend to see further gains and limited downdrafts through the balance of the year.

In a report published Wednesday, Bespoke looked at the S&P 500's performance for each year since 1928, and pulled out the 10 years with year-to-date paths most correlated to 2021. In these similar years, the average gain for the S&P 500 through July 14 was 20.1%, with a median return of 18.8%.

"With this year's gain of 16.2%, the magnitude of the gains so far this year is relatively close to the median of the 10 prior years," Bespoke wrote.

"Looking ahead, the S&P 500's median rest-of-year performance in those 10 years was a gain of 7.1% with positive returns 70% of the time," the firm noted. "Compared to all years since 1928, the rest-of-year gain in these 10 years was considerably stronger than the median rest of year gain of 4.0% for all years since 1928."

In other words, during years in which the market has gone up with the force we've seen so far in 2021, the S&P 500 through the balance of the year tends to deliver stronger-than-normal returns as well.

Additionally, Bespoke notes that in only two of the 10 years most similar to 2021 has the second half featured a drawdown of more than 10%, with the median correction from highs only amounting to a 2.3% drop.

So not only do stocks continue grinding higher in this kind of environment, but they tend to do so with less-than-normal volatility. At least if you're buying the index.

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland