Following the S&P 500 Index’s stellar 31.5% gain in 2019 (including the reinvestment of dividends), it’s natural for many investors to wonder how the market has historically fared following past “great” years to see if the past offers any clues as to what to expect in the future.
Since the beginning of 1926, the S&P 500 has delivered total returns in excess of 20% on 35 separate occasions. The chart below shows that on average, the S&P 500 has returned slightly more than 11% in years following a >20% gain. While slightly less than the 12% gain delivered on average during the full 94-year period assessed, the return is still solidly in positive territory and insignificantly different from the full-period average. This finding suggests that particularly strong individual calendar year returns contain little actionable information for long-term investors. The chart below also demonstrates that the best and worst calendar year returns for the S&P 500 are immaterially different from the full-period results.
To round out the analysis, I also examined the frequency distribution of calendar year returns for the S&P 500 following >20% gain years and compared it to the full-period results. Once again, the historical evidence suggests that strong single year returns are of limited value in formulating expectations for the year ahead.
All index return figures from Dimensional Fund Advisors
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