Statistically, It’s Rare to See 2 Consecutive “Down Years” in the Market (3 minutes)

Many investors were eager to close the book on 2022. After all, the S&P 500 declined by 19.4%, its fourth worst year since the end of World War 2. In case you’re wondering, 2008 (-38.5%) was the worst, followed by 1974 (-29.7%), and 2002 (-23.4%).

What will 2023 bring?

Well, if history is a guide, we’re unlikely to see another negative market in 2023. It’s quite rare to see two consecutive years of declining market returns.

In fact, taking all those years into account since 1946, the market was green about 71% (55 years) of the time and red for the remaining 29% (22 years).

Of those 22 years of negative returns, there were only three occasions when one negative year was followed by another. Those were:

· 1973 (-17.4%) and 1974 (-29.7%)

· 2000 (-10.1%) and 2001 (-13.0%), and

· 2001 (-13.0%) and 2002 (-23.4%).

In other words, when the S&P 500 experienced a negative year, the subsequent year was green 86% of the time. In fact, that very subsequent year delivered an average return of 14.2% (median return of 18.9%).

We mentioned above that 2022 was the fourth worst year since the end of World War 2. It followed 2008, 1974, and 2002. In all cases, the subsequent year delivered exceptional returns. The S&P 500 was up 23.5% in 2009, 31.5% in 1975, and 26.4% in 2003.

These are a lot of numbers, but the point is simple to make. About 70% of the time, the market is positive. Of those years when it is negative, it’s very rare to see a negative market recur two years in a row. When the decline in steep – as it was in 2022 – the subsequent year historically produces a very strong positive return.

We expect 2023 to be a positive year for the market. The headwinds we experienced in 2022 – higher interest rates to combat inflation, the Russian invasion of Ukraine, and the lockdowns in China – are likely to abate and become tailwinds.