"The Market Will Rise," Said the Expert, Suddenly Warning of a 'Plunge'... What's Happening in the U.S.? [Yang Byung-hoon's Overseas Stock Tips]

Famous Bullish Analyst Warns of "Adjustment in the Second Half of Next Year"

"S&P500 Usually Turns Bearish After Two Years of Bullishness"

"Past Patterns Must Repeat" for Validity

Actual Repetition Uncertain... Many Incorrect Cases

In the U.S. stock market, there is a bullish analyst who is second to none. He is Tom Lee, a second-generation Korean immigrant and co-founder and head of research at the investment advisory firm Fundstrat. He recently warned that the U.S. stock market could undergo an adjustment in the second half of next year. What is the reason for this?

Lee's warning of an adjustment is based on two reasons. First, looking at the past trajectory of the S&P500 index, an adjustment has always followed a bull market like the recent one. In a memo sent to investors on the 10th, Lee stated, "Since 1871, there have been five instances where the S&P500 index rose more than 20% for two consecutive years," adding, "Except for one instance in 1996, in the other four instances, the index fell in the second half of the year following the two-year bull market." He argues that the S&P500 index could follow the same pattern this time as well.

Second, the newly established Department of Government Efficiency in the next U.S. administration could negatively impact the U.S. economic growth rate. Elon Musk, CEO of Tesla, and Vivek Ramaswamy, a Republican presidential primary candidate, are set to co-head this department. Musk had declared before the election that "the U.S. federal government's annual budget could be cut by $2 trillion." This $2 trillion is close to one-third of the U.S. government's annual budget ($6.8 trillion). If such a significant reduction in government spending becomes a reality, it could likely impact the U.S. economic growth rate, and this effect could extend to the stock market, according to Lee.

Profile of Tom Lee, Head of Research at Fundstrat. Captured from Fundstrat's website

This task was not as easy as it seemed. The S&P500 index was officially announced in 1957, and prior data must be calculated directly using the same or similar methodology. The most certain way would be to verify the data Lee used. However, it is unknown how he created or used this data, whether he calculated it himself or cited someone else's calculations.

There is a famous study that calculated the S&P500 index before 1957. Robert Shiller, a Nobel laureate in economics and a professor at Yale University, has calculated this data. This data can be downloaded by anyone from Shiller's website.

However, based on this data, Lee's statement was incorrect. According to this data, there were indeed five instances where the S&P500 index rose more than 20% for two consecutive years: 1927-1928, 1995-1996, 1996-1997, 1997-1998, and 1998-1999. However, in the following year, the index fell in the second half only twice, not four times. It fell by 18.16% in the second half of 1929 and by 8.96% in the second half of 2000, while in other times, the index rose.

From 1995 to 1999, the index rose more than 20% for five consecutive years, and I considered 1997, 1998, 1999, and 2000 as 'the year following two consecutive years of a bull market.' For reference, Shiller's data is recalculated considering dividends and inflation rates, so the numbers do not exactly match the S&P500 data after 1957.

Then what if we use Shiller's data only for the period before 1957 and use the S&P500 index data as it is for the period after? It still doesn't match. In this case, the instances where the index rose more than 20% for two consecutive years are reduced to four: 1927-1928, 1995-1996, 1996-1997, and 1997-1998. Among these, the index fell in the second half of the following year only once, in the second half of 1929. In the second half of 1997, 1998, and 1999, the S&P500 index rose by 9.64%, 8.41%, and 7.03%, respectively.

Ultimately, using Shiller's data, we could not derive results that support Lee's explanation. There were cases where adding assumptions not mentioned by him led to results consistent with his explanation. This was when years that did not rise exactly more than 20% but rose close enough were included in the bull market, and when 1995-1999 was lumped together as 'one bull market' rather than 'four repetitions of a two-year bull market.' However, adding conditions upon conditions like this seems unlikely to be persuasive.

Let's go back to the beginning. Lee's explanation is based on the premise that "the past patterns of stock indices are likely to repeat in the future." In fact, such assumptions often lack accuracy. History seems to repeat, but in reality, it does not. There are countless cases where stock market conventions like 'Sell in May' or 'Santa Rally' do not hold true. Even during 'ex-dividend' periods, when stock prices are expected to fall, they sometimes rise instead. The words of people like Warren Buffett and Peter Lynch, who say "there are no rules in the stock market," are indeed correct.

Finally, I looked at how accurate Lee's stock market predictions have been over the past 10 years. The table below summarizes this information. There was a gap of more than 10 percentage points between his predictions and the actual growth rate in 7 out of 10 instances. However, he is not at fault. That's just how the stock market is.

Yang Byung-hoon, Reporter hun@hankyung.com