According to Hong Kong WANDA Communications Agency, S&P 500 index's 15% ROI in the first half of this year is the 21st best performance in the first six months since 1900. According to data from Goldman Sachs, in years where the S&P index increased by 15% or more in the first half of the year, it rose for 72% of the time in the second half of the year, with a median increase of nearly 9% in gains.
S&P 500 index's 12-month Sharpe ratio (which measures the risk-adjusted return) is more than three times the long-term average. Since the market correction in October 2023, the S&P 500 index has risen by 33%, with an annualized total return of 56%.
Recently, the S&P 500 index has not had any fluctuations of 0.5% or more for eight consecutive trading days. The worst daily decline in June was only 0.4%. The Chicago Board Options Exchange volatility index (VIX) is close to multi-year lows of around 12, but this is relatively high compared to the actual volatility of the S&P 500 index in the past 30 days.
At first glance, there's almost nothing to complain about here, but we still need to take a closer look. Behind this optimism, the most popular objection is that the current returns are mainly from a few large companies, and the stocks of traditional industries are performing poorly. The market-cap-weighted S&P 500 index has risen more than ten percentage points higher than its equal-weight version this year.
If it weren't for the $1.8 trillion market cap increase of Nvidia since January 1, we wouldn't be so enthusiastic about the market performance in 2024.
For a long time, the rise of the market has mainly been due to funds chasing companies with the strongest fundamentals and relatively small impacts on the macroeconomy. These companies are seen as scarce and high conviction cyclicality growth targets.
If defensive sectors start to perform well, this could signal an economic slowdown and raise concerns. Although U.S. credit conditions have weakened in recent weeks, they remain very strong.
Jeff deGraaf, founder of Renaissance Macro, believes that last quarter's strong performance in the market has brought positive expectations for the next three months, six months, and twelve months of returns. Currently, the forecast for the next three and six months has been realized, and he expects the upward trend to continue until the fourth quarter of this year, with fluctuations along the way.
All of this still holds true and may be the most trustworthy fundamental scenario. However, the internal dynamics of the market may be building more dangerous extremes, which could make the market more fragile under stress. In the past month, the trend of the S&P 500 has been inversely proportional to the daily market breadth, indicating that the rise has not covered all stocks.
Therefore, although the S&P 500 index has performed well in the first half of this year, investors should remain vigilant and pay attention to potential market risks and changes.
Editor/Somer