What Happens After the Nasdaq Beats the S&P 500

This trend shows that the Nasdaq could be in for a better half of 2020

Senior Quantitative Analyst
Jul 1, 2020 at 8:00 AM
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It was a chaotic first half of 2020, with the three major benchmarks falling and rebounding at remarkable levels. Currently, the tech-heavy Nasdaq Composite (IXIC) is up double-digits despite the coronavirus market sell-off that happened in March. Meanwhile, the small-cap Russell 2000 Index (RUT) index is down double-digits. The S&P 500 Index (SPX 500) is somewhere in between those extremes, down right around 4% this year.

Today, we will analyze historical results to see what usually happens after the Nasdaq strongly outperforms the S&P 500. And while ours seems like a unique situation, we will look at years that resemble 2020 to give us an idea of what to expect going forward.

Nasdaq Outperforms S&P 500 in First Half

For the study below, I went all the way back to 1972, as far back as our data goes and nearly covering the entirety of the Nasdaq's lifespan. Since then, there are a few instances where the Nasdaq was at least 10% higher than the S&P 500 during the first half of the year. The table below shows those years and how the indexes did in the following months.

In the last four instances, stocks did well. The Nasdaq did especially well, with three of four returns right around 23%. Another example was 1999, just before the last leg of the tech-boom. The Nasdaq gained over 50% in the second half of that year.

The tables below show how the S&P 500 did in the second half of those years. To put it simply, it has outperformed its baseline. 

The next few tables, however, show that when the Nasdaq easily beats the S&P 500 in the first half of the year, it tends to do extremely well during the second half of the year. This trend will hopefully continue, though 2020 has a slew of varying factors thrown into the mix. 

Similar Years

For the study below, I went back to 1929, which is as far back as we have S&P 500 data. I used a least-squares method to find past first-half chart patterns that most resemble the first half of 2020. The year that most resembled it was 2001. In the chart below, you can see that stocks fell sharply in the second half of that year, before recovering some of their losses in the fourth quarter. Another similar year was 1942, which resulted in a big gain over the following months. Meanwhile, 1960 and 1977, which are also somewhat like 2020, had lackluster second halves.

Looking at the ten years with the most similar first-half chart pattern, the table below shows how the S&P 500 performed in the second half of those years. The second table summarizes the returns for other years going back to 1939.

The short-term returns are bullish when you look at the average return. That first month, however, shows only four of the ten returns were positive. Looking at the rest of the year, these ten years underperform significantly. The index averaged just over a 1% gain in the second half, with only half of the returns positive. In the other years, the S&P 500 averaged a 4.7% gain with over 70% of the returns positive.

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