How the stock market has performed after a stellar first half, and what may lie ahead

NEW YORK — The stock market just had its best first half of the year since 1998. Now what?

History suggests stock investors will make more money the second half of the year.

Since World War II, a big increase in the first half of a year has almost always been followed by more gains in the second half.

In the 68 years beginning with 1946, the S&P 500 index has risen 10 percent or more 23 times, according to data from S&P Dow Jones Indices. During those 23 years, the market rose the second half of the year 19 times. Eleven of those years, or nearly half, the S&P 500 rose at least 10 percent the second half of the year.

The best second half was in 1954, in the middle of the stock market's longest bull run. Stocks increased 26.2 percent July-December. The worst second half was in 1987. The "Black Monday" market crash was Oct. 19, and stocks fell 17.4 percent the second half of the year.

In years like this one, in which stocks have started with a gain of between 10 and 15 percent, the average second-half increase has been 9.4 percent.

Those numbers suggest that when a rally gets going, it keeps going.

But the factors that drove the market methodically higher the first five months of the year remain: The housing market is strengthening. Auto sales are strong. Companies continue to earn record profits. Inflation and interest rates are ultra low. The economy is growing moderately and may pick up the second half of the year.

"We're going higher," said Phil Orlando, Chief Equity Strategist at Federated Investors. "Rising stock prices and rising real estate prices are making people feel better about their financial condition ... So we think that second-half GDP and second-half earnings are going to be better than the first half."

Orlando predicts that the S&P 500 will end the year at 1,750.

Although many investors had expected stocks to climb this year, they were surprised at the speed of the advance early on. By May 21, the S&P 500 had climbed to a record 1,669 and was up 17 percent. A day later, Fed chairman Ben Bernanke said the central bank was considering pulling back on its stimulus. The market's advance cooled, and the S&P has lost 3 percent since.

Add dividends to the S&P 500's price rise and the total return for investors is 13.8 percent — the most in 15 years.

Here are the five best first halves for the S&P 500 since World War II. Data before 1957, when the S&P 500 was launched, combine the values for four earlier S&P indices: the industrials, utilities, financials and transportation:

— 1975. First half: up 41.7 percent. Second half: down 3.2 percent.

The 1970s began with a bull run, but things soon went sour. The oil crisis of 1973-1974 caused oil prices to soar and the economy entered into what would be a 16-month recession in November 1973. The annual rate of inflation began to climb. It surged as high as 12.2 percent in November 1974 from 3.4 percent a year earlier. The S&P 500 dropped 48 percent between Jan. 11, 1973 and Oct. 4, 1974.

The market soared in the first half of 1975 as inflation moderated and investors grew hopeful the economy was pulling out of its slump. The market gave up some of its gain in the second half of the year as doubts about the strength of the economic recovery grew and concern rose that inflation might re-emerge. New York City's fiscal crisis also weighed on markets.

— 1987. First half: up 27.4 percent. Second half: down 17.4 percent.

But things unraveled in a big way.

Stocks peaked on August 25, when the S&P 500 closed at a record 336. Rising interest rates and concerns about a stock bubble prompted a sell-off in October. That culminated in 'Black Monday' on Oct. 19, 1987, when the index plunged 57 points, or 20.5 percent, to 224.

— 1983. First half: up 22.2 percent. Second half: up 0.25 percent.

In early 1983, the great '80s bull run was just beginning. It had started the previous summer after the Fed lowered its benchmark interest rate from 14.5 percent to 10 percent. President Reagan's tax cuts also got the economy going after it had contracted for much of 1982.

But the surge in stocks stalled in the second half. Investors worried that the expanding economy would revive inflation and compel the Fed to raise rates.

The factors that had given stocks a lift in 1983 were still in play. Also, falling oil prices helped lower the threat of inflation and allowed the Fed to cut interest rates. The price of oil dropped as low as $10.42 a barrel in March, after starting the year at $26.30 a barrel.

— 1954. First half: up 20.6 percent. Second half: up 26.2 percent.