In the pevious blog, ‘Not a Bubble’, we illustrated how the rise in the US stock market has actually been quite normal when looking at the market’s average returns over a 3 year basis.  When looking at the history of gains, investors may be surprised to find that strong annual returns are more common than one might think.

With the books closed for 2024, the S&P500 recorded a 25% gain (including dividends), which may seem abnormally strong. However, double digit returns are far from being an outlier with average gains in an “up” year being +21%. Out of the 71 positive performing years since 1928, investors have seen double digit gains 58 times. As this represents 80% of the time, double digit movements are more the norm than the exception.

Stlll, after such a strong year, some investors may be wondering what history says about returns after up years. Encouragingly, history shows that upward momentum for the S&P 500 tends to carry forward. In the year after positive returns, the S&P 500 has advanced 11.3% on average and was positive 74% of time. When positive returns extend over two consecutive years, the third year has averaged a 9.1% gains and has been positive about 70% of the time.

Just a few years ago, 2022 reminded investors that the S&P 500’s long-term upward trajectory can be interrupted by sharp corrections. Since 1928, 62% of the years producted at least a 10% intra-year price corrections. Despite this volatility, however, the S&P 500 has delivered positive annual total returns roughly 70% of the time over the past 96 years. Afterall, the long-term trend for the stock market is usually upwards because the economy and profits tend to grow over time. We recommend investors to set expectations for potential volatiltiy and more modest returns in 2025. Those investors with a time horizon of at least three years should pay less heed to pullbacks and consider using them to add to equity positions.