Blue Haven

How does the S&P 500 do after a big year?

By December 19, 2023 No Comments

The S&P 500 is on pace to return more than 20% during 2023. We were curious how the S&P 500 has done in the year after rising 20% or more. Since 1926, the S&P 500 has risen 20% or more 36 times (2023 will be the 37th). Of those 36 times, the index has risen the following year 69.50% of the time. The average and median return in the year after a 20% gain occurred is 10.53% and 12.83%, respectively. Let’s look at the numbers a little more closely.

Returns aren’t much different than “average”

The first thing that stands out to us is the average yearly return of 10.53% following a 20% gain is nearly identical to the “average” return of all years. Since 1926, the S&P 500 has risen an average of 10.20% per year. Secondly, the positive return rate of 69.50% is very similar to the positive return rate of 73% for all years. With that said, there are some big returns in the years after a 20% gain. Most recently, the S&P 500 rose 18% in 2020, after rising more than 20% in 2019.

The 1990s also saw a big run for stocks where big gains followed big gains. On the negative side, 2022 saw the S&P 500 decline 18% after it rose more than 20% in 2021. So the very recent past is a mixed bag.

One encouraging anecdote is that there is a lot of time between the worst negative sequences following a 20% rise in the S&P 500. Said differently, because we just had a big down year in 2022, there’s nothing in this statistical data set that would imply another large down year happens again so quickly.

Where things get a little more interesting is if we segment the positive years versus the negative years. The average and median positive return in the data set is 19.50% and 18.67%, respectively. The average and median negative return is 9.82% and 8.07%. One might find comfort in the fact that the numbers are twice as good in positive years as the bad numbers are in negative years.

Expectations into next year

The market entered 2023 on very nervous footing. This was supposed to the be year that the market buckled under pressure from high interest rates. Instead, stocks rose more than 20% for the 37th time since 1926. Such a rally might lead one to wonder if the market will just come crashing back down next year. The data says that’s not the odds on bet.

Historically, the S&P 500 has risen almost 70% of the time in the year after a 20% gain. What’s more, those positive next-year returns have historically been quite large, averaging 19.50% when the market has gone up a second year in a row after a 20% gain in the preceding year. If, however, things develop negatively throughout the year, the historical data suggest a decline of between 8-10% is possible in 2024.

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