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Mark Hulbert

Placing your bets for 2012's second half

6/27/12 12:01 AM ET (MarketWatch)Print

CHAPEL HILL, N.C. (MarketWatch) -- Hoping for a better second half of 2012?

That's certainly understandable. With just three days left in the year's first half, the Dow Jones Industrial Average (DJIA) has turned in an anemic year-to-date return of just 2.4%. That's well below the stock market's long-term average of around 10% annually.

But, I surely don't need to remind you, hope is not a strategy.

And is there more than hope on which to base a bet that below-average first halves are followed by better-than-average second halves?

That's what I am devoting this column to answering.

To find out, I fed into my PC's statistical software the data for the Dow's return over the first and second halves of every year back to the late 1800s, when this benchmark was created.

What I found appears in the accompanying table.

You might think that the difference between 60% and 70% is big enough on which to base a second-half bet. But it isn't. The difference between these two percentages is not significant at the 95% confidence level that statisticians use to determine whether a pattern is genuine.

Notice carefully, however, that if you were nevertheless to insist on ascribing meaning to these results, you'd conclude from the anemic first half of this year that the second half will be a below-average performer as well.

Is there any special pattern during Presidential election years? No: The results are almost identical for such years as over the entire sample.

We should not be surprised by these findings, given the stock market's much-vaunted efficiency.

After all, if it were the case that the market's return in the first half of a year were a reliable predictor of its return in the second half, then investors would rush into the market in late June to buy or sell, depending on the direction of the market's year-to-date return. Investors would soon learn that they could jump the gun by acting even earlier than late June. Eventually the historic relationship would disappear.

Stocks may nevertheless turn in an anemic second half of 2012 -- or worse. But if it does, it won't be because the first half of the year was so weak.