S&P 500 Trends: Lessons from a Century of Returns

Analyzing the long-term performance of the S&P 500 offers fascinating insights into the cyclical nature of markets. Historical data spanning nearly a century, as tabulated by Charlie Bilello, shows an interesting trend: after consecutive years of high returns, the market often experiences a down or flat year. Let’s dive deeper into these patterns and what they mean for investors.

High Returns Often Followed by Corrections

Looking at the data, there is a consistent pattern where multiple years of strong double-digit returns are followed by a less favorable year. For instance:

In 1935 and 1936, the S&P 500 had consecutive high returns, only to drop by 35% the following year.

The 1950s saw a similar pattern where consecutive strong years like 1950 and 1951 were followed by weaker performances.

In the late 1990s, from 1995 to 1999, the S&P 500 delivered five consecutive years of double-digit returns, but the next three years saw continuous declines, highlighting the cyclical nature of markets.

The Recent Decade: Similar Trends Persist

More recently, the S&P 500 saw stellar returns in 2019, 2020, and 2021. However, 2022 turned out to be a down year, consistent with the historical trend. The exceptional returns in 2023 and 2024 signal that a corrective or flat year could be on the horizon in 2025 or 2026. While historical patterns don’t guarantee future outcomes, they serve as a useful guide to temper expectations.

Lessons for Global Markets

While the data is specific to the U.S., the sentiment and trends of the S&P 500 often ripple through global markets. For example, India’s markets have also seen a significant rally in recent years. However, many analysts believe that valuations are now stretched, which could suggest a period of consolidation or even a down year in the near future. The key takeaway for global investors is to stay prepared for potential slowdowns and adjust their strategies accordingly.

Preparing for a Down Year

Down years, while challenging, often present opportunities. Historically, markets tend to recover strongly after a significant correction. For instance:

After a 37% decline in the market, subsequent years delivered returns of +26% and +15%.

These dips are moments to position oneself for the next rally, as markets often revert to their mean performance over time.

Investors should view these periods as chances to reassess portfolios, accumulate high-quality assets, and prepare for the eventual rebound.

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