By Mark Hulbert
The history of the Dow Jones shows that the odds favor bullish investors, regardless of market conditions.
There is a 68% chance that the US stock market will rise in the second half of 2024. This is based on the 128 calendar years since the Dow Jones Industrial Average DJIA was created in 1896. In 87 of those years, the Dow Jones rose during the second half of the year, or 68% of the time.
Some of you may wonder if the likelihood of a second-half profit increases if, as is the case this year, the stock market rises in the first half of the year or inflation trends downward. The answer, as far as I know, is "no." I could not find any objectively defined subset of years in which the probability of the stock market in the second half, at the 95% confidence level, was greater than 68%.
This is illustrated in the accompanying chart, which shows that the odds of a second-half gain are remarkably close to 68%, regardless of the factor used to define the subset. Each of these factors was chosen because it matches current conditions. The lack of statistical significance for any of them means that the best estimate of the probabilities of the second half of this year is the one that emerges from the entire sample: 68%.
As an example, consider those years since 1897 in which the stock market, as it almost certainly will this year, rose during the first half of the year; there were a total of 78 such years. In the second half of those years, the Dow Jones rose 57 times, 73% of the time. Although you might think that the increase in probability from 68% to 73% is significant, it is not at the 95% confidence level.
Market efficiency
These results are precisely what we would expect, given that the stock market is so efficient. A hallmark of such efficiency is that markets "base their level on anticipated future returns and don't factor history into the calculation," Lawrence Tint told me in an interview. Tint is the former US CEO of Barclays Global Investors, the organization that created iShares (now part of Blackrock).
Investors who think otherwise are guilty of what is known as the "gambler's fallacy." This fallacy is perhaps most easily detected by flipping a coin. After several heads in a row, most of us believe there is an above-average chance that the next toss will come up tails. In fact, of course, the odds of coming up heads or tails are the same on every toss, completely independent of what happened before. The same largely, or almost entirely, applies to the stock market.
The bottom line? There is a two out of three chance that the stock market will rise in the second half of 2024. That's good news, but this good news stems from the stock market's bullish bias rather than anything unique to this particular year.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at mark@hulbertratings.com
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-Mark Hulbert
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06-22-24 1223ET
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