How many times have you heard that phrase in your life? At the start of every year, when strategists are asked what their view on the market is, the response invariably sounds something like, "We expect near term volatility and potential weakness in the equity market, but see the economy and earnings picking up steam in the second half of the year." The purpose of a statement like this is often so the person can claim they were right no matter what happened. If the market goes down, and never rebounds they can say they were right to get you out of the market (and hope that no one remembers they said it would be a strong second half). If the market goes straight up, instead, they can say something like the market looks six months ahead, so since we were expecting strength in the second half, you should have been buying in the first half to anticipate that pickup.
This year, though, the term a second half story has actually played out, but in a different way than you might think. The chart below shows the performance of the S&P 500 so far this year. In the chart, each quarter of the year has been broken down into halves. So the first half of each quarter is shaded in gray, while the second half of the quarter is not shaded. For each half of each quarter, we have also labeled the performance of the S&P 500 during each period. As you can clearly see, the first half of every quarter so far this year has been negative for the S&P 500. In fact, the three largest peak to trough declines have all originated and ended in the first half of each quarter. Like the first halves of Q1 and Q2, the first half of Q3 ended with a decline for the S&P 500. On the bright side, the second half of each quarter has been positive for the S&P 500, with gains of 1.83% and 4.78%, respectively. With today marking the first trading day of the second half of the third quarter, bulls are hoping this pattern of 2014 continues to hold and that the third quarter is once again a second half story.