The big-year dilemma

12/26/19
  • SPX has gained 20% or more in only 14 other years since 1959
  • Index has gained ground the following year 11 times

By any measure, 2019 has been a banner year for stocks. Barring an epic sell-off in the next four trading days, the S&P 500’s (SPX) annual return will top 20%—something that’s happened only 14 other times since 1959, most recently in 2013.

This year followed the historical pattern of US stocks putting up big numbers after down years (SPX -6.2% in 2018), which begs the question, what has the market tended to do after exceptionally strong years? The natural assumption may be that returns would be subpar—if not negative, perhaps weaker than average, since the market has presumably expended so much bullish energy in the previous year’s runup.

That hasn’t necessarily been the case. Here’s what the SPX has done in the 14 other years following its 20%-or-better annual returns since 1959:

S&P 500 returns after 20% (or larger) up years
Year Return Next Years Return
1961 23.13% -11.81%
1967 20.09% 7.66%
1975 31.55% 19.15%
1980 25.77% -9.73%
1985 26.33% 14.62%
1989 27.25% -6.56%
1991 26.31% 4.46%
1995 34.11% 20.26%
1996 20.26% 31.01%
1997 31.01% 26.67%
1998 26.67% 19.53%
2003 26.38% 8.99%
2009 23.45% 12.78%
2013 29.60% 11.39%
  Average 10.6%

Source: Power E*TRADE

The two big takeaways:

1. The index was up the following year 11 out of 14 times.

2. The SPX’s average return in these years was 10.6%—nearly 3% more than its 1959–2018 overall average annual return of 7.8%.1

There’s a big caveat, though: The 1990s uber-bull market contributed mightily to these figures—the SPX gained more than 20% annually from 1995–1999. Take away those years, and the SPX’s average return after 20%-plus years shrinks to a much more modest 6%.

Experienced traders adjust to changing market conditions, and know to take what the market gives them—they don’t push the margins when risk outweighs potential reward. If next year turns out to be less “auto-bullish” than this year, that will simply make patience, trade selection, and risk management all the more important.

 

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1 Reflects S&P 500 closing price data from 12/31/58–1/31/18. Supporting document available upon request.

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