Will Second Half Be Big For Stocks?

By Will Meade and Bryan Rich 

July 1, 2016, 11:30am EST

Yesterday we wrapped up the first half of 2016.  Today we want to step back and take a look at how markets fared in the face of a lot of threats, if not chaos.

Even after Brexit, an early year correction surrounding the oil price bust, and an indecisive Fed, U.S stocks are UP for the year!

The old adage that stocks climb a wall of worry during a bull market continues to hold true.

The S&P 500 ended the first half of 2016 up 2.7%, while the blue chip Dow Jones Industrials Average rose 2.9%. The tech-growth heavy Nasdaq was the worst performer ending the first half of 2016 down 3.3%.

This tells us a couple of things: first the world is not falling apart (contrary to what most people think).  In fact, U.S stocks are putting up nearly a 6% annualized return for the year (just shy of the S&P 500’s historical average — better than the long term average on an inflation adjusted basis).

Most interesting, value stocks are significantly outperforming growth stocks – for the first time in a long time.  The Russell 1000 value index is up 6.1% for the first half of 2016 vs a 1.3% loss for the Russell 1000 growth index. So value stocks are outperforming growth stocks by more than 7 percentage points this year or around 14% on an annualized basis.  Never have we seen more blue chip stocks trading at incredible, beaten down values – 7% of the S&P 500 is trading below book value.

Remember, in the past few months, we’ve talked about the similarities in stocks to 2010. Through the first half of this year, we’ve had the macro clouds of China and an oil price bust that shook market and economic confidence. Back in 2010, it was Greece and a massive oil spill in the Gulf of Mexico. When the macro clouds lifted in 2010, the Russell 2000 went on a tear from down 7% to finish up 27% for the year. This time around, the Russell has already bounced back from down 17% to up 2%.

With economic expectations in the gutter, global rates at record lows, and central banks continuing to ease and buffer potential shocks to the system, the opportunities for positive economic surprises have never been greater.  We think positive economic surprises in the next half can be the catalyst for a surprisingly big second half for stocks.

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