What Happens After A Good Year In The Stock Market? (Returns And Performance)

After a positive year for stocks, S&P 500 tend to rise 6.75% the next year, not including dividends. If the S&P 500 drops one year, the next year return is on average 12.1%. After a good year in the stock market, the return is 8.5% – slightly more than the long term average.

Many investors are fearful of buying after a good run in the stock market. We decided to have a look at the performance for stocks after a positive year: What happens after a good year in the stock market?

In this article, a good year is regarded as a gain of more than 20%.

Table of contents:

Good and bad years in the stock market – that’s life

Predicting the stock market’s performance in the long term can be challenging, but there are some general trends that can be observed.

Historically, the stock market has experienced periods of both ups and downs, and there is no guarantee that a good year will be followed by another good year.

However, there is also no guarantee that a bad year will be followed by another bad year. But over the long run, you’ll get returns that most likely are close to the historical returns for the different asset classes.

Why stocks tend to up up – over time

The markets are pretty random one year from another, except that the stock market tends to rise over time.

Why?

The most likely explanation is productivity gains and monetary inflation. Most research we have seen determines that the stock market has returned 5-7% above the inflation rate over the past century.

What’s the average 1 year return in the stock market?

To make a benchmark for our analysis, we need to calculate the nominal annual return for stocks. We look at the S&P 500 because it’s the most important stock market index in the world.

Since 1960, the S&P 500 has returned about 8% annually, excluding dividends reinvested. Thus, the stock market has returned close to 10% annually all gain included. Stocks are the best asset class (of stocks, bonds, and gold).

What are the possible outcomes after a good year in the stock market?

Let’s look at the three possible outcomes after a good year in the stock market:

Another good year:

This is the most common outcome. About 70% of the time, the stock market will experience positive returns in the year following a strong performance (which is an up year).

This might be because investors are generally more optimistic about the future of the economy after a good year, which leads to higher stock prices.

A mild correction:

A correction is a short-term decline in stock prices. This can happen after a good year as investors take profits and/or reevaluate their portfolios. Corrections are a normal part of the market cycle, and they can actually be healthy for the market in the long run.

If you are a future net buyer of stocks you want to buy low – not high! Thus, a decline should be treated like a gift from Mr. Market.

A bear market:

A bear market is a more severe decline in stock prices, lasting for several months (even years) and characterized by declines of 10% or more.

Bear markets are less common than corrections, but they can be more damaging to investor portfolios.

In our opinion, the two most recent bear markets were the dotcom crash in 2000-03 and the financial crisis in 2008/09.

The Covid crash in March 2020 was very painful, but lasted only for a couple of weeks.

How long should you stay invested in the stock market?

Over the long term, you are more likely to get the long term average the longer you are invested.

The rolling returns for S&P 500 shows that since 1993 you have had only one ten-year period of negative returns (in 2010).

Thus, you should start saving and investing early!

How many years does it take to recover from a stock market crash?

There is no specific answer to that. However, a 50% drop in value need a 100% rise to recover.

The late Charlie Munger once said that you should not invest in stocks if you can’t tolerate a 50% drop in value.