A banner year for stocks doesn’t necessarily mean that the market is “borrowing returns” from the following year, according to research from Bespoke Investment Group.
The S&P 500 is up more than 27% this year, the best run through Dec. 16 since 1997. But instead of this being a sign that the market is due for a pullback, similar situations in the past have resulted in gains in the final weeks and in the following year. The gains were typically more modest.
In the years where the market was coming off an annual gain of at least 20%, the S&P 500 rose by an average of 6.58% the following year. This is slightly below the average return of 7.59% in all other years since 1928, but the year following a rise of at least 20% rise was more likely to be positive than other years.
“In neither of the cases are the differences large enough to suggest significant evidence that a strong year either borrows from future returns or leads to stronger than average returns in the year ahead,” Bespoke said in a note published Monday.
A similar pattern is seen when looking at just the last few weeks of a good year. In years where the market was up at least 20% through Dec. 16, the last two weeks of the year saw positive returns 73% of the time, tacking on an additional 1.78% on average.
“I think we can see an average year for the market going into next year,” Bespoke co-founder Paul Hickey said on CNBC’s “Closing Bell” on Monday. “I don’t think we’ve borrowed from future returns. Statistically, when you see strong years, you don’t necessarily see major underperformance the next year.”
The absolute size of the return was also not predictive of what the market would do in the next 12 months. When looking at every year since 1928, the performance of the stock market in one year was not correlated with the performance during the previous year, according to the research.