Late last week, we sent paid clients our popular “decile analysis” of third quarter market performance through August. Our decile analysis identifies stock characteristics that are driving performance over any given period. One of the most interesting trends we found is that performance so far in the third quarter is pretty much a mirror image of what we saw in the first half of the year. We highlight this below by breaking up the S&P 500 into deciles (10 groups of 50 stocks each) based on performance in the first half of 2016. Decile 1 in the chart contains the 50 stocks in the S&P 500 that did the best in the first half, while decile 10 in the chart contains the 50 stocks that did the worst. The bars in the chart represent the average change of the 50 stocks in each decile so far in Q3.
As shown, the 50 best-performing stocks in the first half of 2016 were actually down an average of 1.9% in Q3 through August. As you move from left to right on the chart, performance gets better and better, until you get to decile 10 (50 worst stocks in the first half), where the average stock was up a whopping 11.9% in Q3 through August. If you rode the stocks that worked best in Q1 and Q2 into Q3, you likely had a rough July and August compared to the broad market. If you reversed course and rotated into the worst performing stocks in the first half, you likely had a banner two months!