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What happens after a BIG stock market year?

What happens after a big stock market year?

I’ve written before that bad years, such as the one we all experienced in 2022, are often followed by good years. Not always, but there is a very clear statistical trend that good follows bad. 

As we have seen, 2023 was an excellent year for investors. The S&P (an index of large US companies) posted a gain of 26%, most of which arrived in the final two months of the year. 

Here are the 10 worst S&P years, followed by the year that proceded. 

The very sensible next question is, therefore, what happens after a good year such as 2023? Or more specifically, how often are good years followed by… more good years?

The market is not predictable. Over big periods of time, such as decades, we do see clear trends and we use those patterns to plot the most likely outcome in your WealthMap® plan. Which we then track your performance on an ongoing basis and as part of your Momentum® service. 

As you might expect, there are bad years that follow good years. Here are all the bad years since 1928 that followed double digit good years. 

This happened as recently as 2022, following the positive year of 2021. Psychologically, good times can have a negative effect on us. ‘Pessimism bias’ is a cognitive trend that means we overestimate the likelihood of something bad happening, and it’s often experienced after something good happens to us, such as the rapid improvement in our portfolio value. 

I’ve heard many ‘experts’ say recently that “the markets are frothy”, the “gains can’t last” and the “easy money has been made”. There are countless TV channels that feed this drivel to investors 24/7. 

Perhaps, time will prove them right. Maybe markets did run ahead of themselves at the end of the year. The much feared and - highly predicted amongst most economists - recession of 2023 didn’t happen. Perhaps it will this year. The good times can’t last forever. But it’s important to remember the data shows that the good years do, in fact, cluster together. 

I looked back at the annual returns for the S&P since 1928 and found that big gains were often followed by - you’ve guessed it, further big gains. 

Here are the double digit positive years that were also followed by double digit positive years. 

There are 16 separate periods where gains cluster, over a 40 year period. That’s over 40% of the time. 

And you don’t have to go far back to find a string of good years in a row. The period of 2019 - 2021 gave us returns of +31%, +18% and +28%, all back-to-back. As we know, that came to a shuddering end in 2022. 

Good years can cluster and do, as I have shown. But we also have periods of bad returns. This makes investing in the stock market both exhilarating and at times frustrating, in equal parts. 

The period of return you receive throughout the whole period of investment is all that matters. But, short term returns always receive all the attention. The danger is that we let those short periods formulate our decisions around investment and life. 

I hope this data will give you confidence that whilst the good times can’t last forever, they may last a little longer than you expect. 

Most importantly of all, by sticking to your plan and following trends that span decades instead of years, you can continue to enjoy your own version of good times. May they continue to roll.

Tom.

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