Looking Back to Look Ahead

Most weeks, 361 Capital posts a research report examining various market related topics. They’re generally excellent, and the final report of 2013 contained a chart (Figure 4) which looked at the annual price performance of the market. There were a few takeaways from this chart that I thought were useful.

Firstly I’m offering a disclaimer, particularly in light of my post yesterday where I alluded to the market’s fixation on setting expectations. Just because the market behaved a certain way in the past has no bearing on what will happen in the future. The market could go up. Go down. Go nowhere. Bane could take over the NYSE. Who knows what else?? Barry Ritzholtz had the right idea. I view predicting the future moves of the market as a colossal waste of time.

Having said that (shout-out to Larry David), looking at what’s occurred has its uses. At the very least, it doesn’t hurt to see how past investors have responded to similar circumstances. Talking heads love to declare that something happening now is the biggest and baddest ever, throwing out declarations such as “This is the most dysfunctional political climate in US history” (uhhh…. Civil War, anyone?). It’s seductive to think we live in extraordinary times, as people like to think that they and the times they’re living in are unique. There certainly are many parts of today’s life that differ from the past; that’s not my point here. In the realm of investing, however, I believe that much of what drives the markets has changed little through the years. We as humans are still prone to fear, euphoria, and bias, just as we always have been. So, in looking at 361 Capital’s chart, I had the following thoughts:

  1. The market goes up far more than it goes down. Admittedly, this is not groundbreaking news. I feel it’s important to point it out, however, as many people I know and respect view the markets skeptically. Over 65% of the years since 1896 have been in positive territory. 65%!!! And over the past three decades that number jumps to 77%! Since 1984, there have been two years where the market was down at least 20% (2002 and 2008), whereas the markets have gone up at least 20% in ten different years. Check it out:
  2. 1.7.14 chart2013 will be tough to repeat. Aside from the 4-year stretch we saw in the mid-1990’s, the last time the S&P 500 increased for two consecutive years above 20% was 1954-55. The phenomenon did occur a few times earlier in the last century (1897-98, 1904-05, 1924-25, 1927-28, and 1935-36; note that the DJIA was used for the years before the S&P 500 was established), but in the past half century it’s been a rare occurrence. 
  3. Great years happen more often than we think. Twelve of the last fifty years have seen the S&P 500 increase by at least 20%. Looking at the following year, the average increase is 12.41%, an amount that exceeds the S&P’s average annual return:

1.7.14 chart2

Again, don’t expect the market to increase 12.41% just because that’s what it’s done on average following years like 2013! The point here is not to predict, but rather to show what has occurred before. Given the trauma experienced around with last recession, many writers, thinkers, and investors are seemingly on pins and needles, waiting for the other shoe to drop. If fundamentals remain strong, earnings continue to improve, and no unforeseen calamities strike, then there’s no reason the market can’t continue to grow! It may not occur at the level of 2013, but history shows us that – more often than not – a year like we just experienced is not in of itself a predecessor of economic calamity.


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