Behind the Curtain of Wall Street's Bounce Back Year

The year 2023 is in the books and can be looked at as a bounce back year for stocks. The S&P 500 Index (SPX) gained 24% for the year after losing close to 20% in 2022. So, we begin 2024 right back where we began 2022. The table below summarizes S&P 500 data for each year back to 2000.

As you can see, the index gained 24% for the year with 55% of the days positive. The rest of the data is interesting. The average positive return during the year was a gain of 0.67%, which ranks the third highest since 2000. Down days averaged a loss of 0.62%, which was the fifth biggest loss. Given those figures, I would expect a lot of big daily moves. However, just 26% of the days saw a move of 1% or more in either direction, which is slightly lower than the average of 28%.

The Year After a Big Year

When stocks experience a period of strong performance, investors often wonder whether this upward trend can persist or if a reversion to the mean is likely. The table below summarizes the yearly returns of the S&P 500 based on its previous year’s performance. The data indicates there’s nothing to worry about. Stocks have tended to perform significantly better after a huge year, compared to merely a good year. When the S&P 500 was up 20% or more, like in 2023, the next year averaged a return of 9.94% with 80% of the returns positive. For all the other years, the index averaged a return of 8.8% with 68% of the returns positive.

Here are some hopeful numbers. I looked at the 20 times since 1950 that the S&P 500 gained 20% or more. I found that the second half of 2023, in which the index was up 7.2%, was the third worst second half of those huge years. The table below lists the six years that the index was up less than 10% in the second half of a 20%+ year. The last column shows the returns in the next year. The S&P 500 was positive all five other times with an average return of more than 17%.

Finally, I summarize the yearly returns based on the second half of the prior year, in which the S&P 500 gained at least 20% during the previous 12 months. The current situation, in which the prior year was up 20% or more despite a second half return of less than 10%, has led to very good years. Hopefully, this trend continues in 2024.