The S&P 500 fell nearly 34% in just twenty-two trading sessions during the pandemic outbreak last spring. Then after a day with a minus of -2.9%, the market bottomed out on March 23, 2020. The following Monday the market rose more than 9% and has not looked back since.
The one-year return from that low was a staggering 75% and doesn’t include dividends. A profit of this magnitude in such a short time is a rarity on the stock market. In fact, that was the biggest win in 12 months ever since 1950.
There were bigger gains of a year during the Great Depression, but the losses were so much greater then that it is difficult to compare apples to apples with that time.
The question for many investors is: what’s next?
It is understandable that many investors fear that these gains have come too fast and too far. There is no “easy” thing to do when it comes to investing in the markets as the future is always uncertain, but the past year or so has been of great importance for investors in risk-weighted assets. It feels like the easy money has been made.
To get a better sense of how the markets reacted to such booming profits, I looked at the returns over the next year, three, and five to see what happened after this enormous past wins.
To do this, I have incremented 50% or more in the S&P 500 every 12 months since 1950 and then calculated the following increments of 12, 36, and 60 months to see how much follow-through there was.
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It is not surprising that one year returns showed a decline after such large gains. The markets cannot rise in a straight line forever. In fact, the 12 month return was negative 65% of the time, after increasing 50% or more over a period of a year. As with most long-term market averages, there was a wide range of outcomes here. There were double-digit increases in one quarter of the year, while double-digit losses were recorded in a fifth of the cases. While most of the returns have gone south, this is not something that can be taken for granted.
However, the further you go, the better the returns. There has not been a single period of 3 years after a 12 month gain of 50% or more showing a negative return. There was only one five year period of losses, and that came at the end of the 2000-2002 market crash when the market fell 50%.
The average annual returns over 3 and 5 years were 7% and 11%, respectively, and these returns do not include dividends.
These performance numbers may come as a surprise, but there isn’t much correlation between one year of return and the next mostly. This table shows the average returns on the stock market in a given year after a loss, double-digit loss, profit, or double-digit profit in the previous year:
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The returns in one year don’t really affect the returns in the next year. And this is even more true when the stock market is on the up than when it is on the downside. The average returns after a good year are roughly in line with the long-term average.
There are always good reasons to discourage yourself from investing in the stock market. It is possible that the market will take a breather at some point as gains fell so sharply last March. You could even claim this is healthy to avoid getting things overheated.
However, it is much more difficult to predict the future price of the stock market based on what it has done over the past year than it sounds. Most of the time the stock market is going up, but sometimes it goes down about as much as it gets when it comes to setting expectations for your portfolio.
It is also true that the longer your time horizon, the better your chances of seeing profits in the market.
Ben Carlson is Director of Institutional Asset Management at Ritholtz Wealth Management. He may own the securities or assets discussed in this piece.
This story was originally featured on Fortune.com
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This article originally appeared on finance.yahoo.com
