2022 was also the 26^th time the index has delivered negative returns for a calendar year since 1928 (see exhibit below). The long-term trend for the S&P 500 is usually upwards because the economy and profits grow over time, but 2022 was a reminder that this long-term upward trajectory can be interrupted by sharp corrections. On a total return basis, the S&P 500 has been down in roughly a quarter of the years since 1928. During these 26 down years, the S&P 500 posted average returns of -13.5% (median: -9.5% and range: -1.1 to -43.8%), with half of them reaching double-digit territory.

 

After such an unpleasant year, many investors are likely wondering what history says about returns after down years (see exhibit below). Encouragingly, history shows that two consecutive years of losses are quite rare for the S&P 500, even if not unprecedented. Since 1928, the index has only posted a negative total annual return for two straight years eight times since 1928. These successive years of losses occurred during the Great Depression, World War II, the OPEC oil embargo crisis, and the bursting the dot-com valuation bubble (which was compounded by the 9/11 terrorist attacks and the Iraq war). More broadly, in the year after negative returns, the S&P 500 has advanced 12.6% on average (median: +20.4% and range: -43.8% and +52.6%) and is positive 68% of the time, slightly below the historical odds.

 

Takeaway: Investors looking ahead at 2023 could take some solace in the fact that successive negative years are uncommon for the S&P 500, which has posted two consecutive down years less than 10% of the time since 1928. In the select instances that the index has been down more than one year in a row, it always coincided with major economic or geopolitical events (such as recessions and oil shocks). Stated differently, for the S&P 500 to be down again in 2023, there would likely need to be such an adverse “event” (more on this risk below).

As for what could help stabilize the U.S. stock market and catalyst a rebound after a challenging year, the key ingredients would likely include some combination of monetary stimulus and fiscal support in the form of lower interest rates and government spending (e.g., 2009 and 2019). With inflation on a descending path, the Fed could be in a position to take a pause on rate hikes sometime in the first half of this year, potentially alleviating upward pressures on bond yields. The prospect of fiscal support seems more uncertain, as a divided Congress probably means a relatively lower likelihood of a substantial federal government spending package in the absence of a severe economic downturn.