Join me on a brief trip down memory lane to October 2022. A sense of exhaustion has settled over the country. The coronavirus crisis is in the rearview, but the effects are not. The lockdowns of 2020 wreaked havoc on supply lines. Pictures of container ships anchored outside ports and anecdotes of 6-month wait times to be unloaded are flying around social media. The Consumer Price Index (inflation) reached 9% annualized a few months ago in June – the highest reading since the inflationary nightmare of the early 80s. The Federal Reserve is hiking interest rates at a blistering pace. Everyone is arguing about vaccines. The initial shock of Russia’s February invasion of Ukraine has evaporated but so has any hope of a swift resolution. The chaos of the 2020 presidential election is on everyone’s minds as the ’22 mid-terms approach next month. No one is really surprised the S&P 500 is down 25% on the year. Most discussions of the stock market focus on how much further it will fall.
You know the story now. October 2022 turned out to be the bottom of that particular bear. The S&P 500 returned a furious +68.48% from there through the end of 2024. It's easy to look at past charts of stock market recoveries and think look how easy it was, the stock market always bounces back. This is incomplete thinking, as no one invests in a vacuum. Those returns following steep declines happen amidst fear and uncertainty too easily forgotten with the benefit of hindsight. The fear and uncertainty was palpable in 2022. Morgan Housel said all past declines look like an opportunity and all future declines look like a risk.
The current bull market is now just over two years old and has notched back-to-back 20+% return years. In the era of short attention spans, 2022 is a distant memory. Now concerns of a “top” are making their way into the milieu. 20+% in ’23 and ’24, aren’t we due for a decline? The Gambler’s Fallacy percolates in our subconscious - that mistaken logic where we assume the next coin flip will be heads since the last five were tails. We conclude two good years in the markets must be the prelude to a bad year. Here are the annual returns for the S&P 500 in years following back-to-back 20+% returns since 1950:[i]
Historically, two good years is no cause for concern for the upcoming year. Two caveats here. First, any statistician will immediately protest the small sample size. n=8 does not quite qualify a robust sampling. True, but we only have so much recorded history to work with regarding market data. In 300 years, we will have 375 years of post-WWII stock market data to draw from. I envy the ease with which my descendants will employ robust data samplings when making arguments about the stock market. Second, this sample shows 75% of the years following back-to-back 20+% returns the market delivers another positive year. This should be viewed within the historical context that 75% of all one-year periods in the market show positive returns. The returns of 2023 and 2024 simply have no bearing on how 2025 will play out. Though we will mention the average bull market since 1950 has endured about six years.[ii] If 2025 turns out to be the end of this bull, it will be one of the briefest of the post-war era.
Sean Cawley, CFP®
*Casinos make truckloads of money exploiting the Gambler’s Fallacy – particularly on roulette wheels. It landed on black the last four rolls, it’s gotta be red this time!
**Data Source: YCharts
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[i] Market Outlook 2025, Carson Investment Research, pg. 22.
[ii] Stock Market Historical Tables: Bull & Bear Markets, Yardeni Research.