The questions I am getting from clients now are focused almost entirely on three specific things: (1) the equity market is at an all-time high and coming off a big year for returns…..danger territory?; (2) inflation running hot and inflationary pressures everywhere, and (3) is the Fed about to abruptly end the economic recovery? All excellent questions – lets tackle #1 today.
Over the past 40 years, the US equity market has delivered +20% oversized returns 11x. In 9x out of these 11x the following year the market had positive returns. The average of the following years return was +13% – please see the nice chart below. Negative returning years were 1981 and 1990. In 1981 (following a solid 1980), the Fed’s battle versus extremely high interest rates had just commenced. In 1990 (following a solid 1989), the yield curve had inverted and a regional recession (NE, TX, AZ real estate) was underway. We don’t cherry pick data, though. But 9 out of 11 is a pretty good batting average following big up years for the market. Data is data.
It’s also interesting to note that early in the following year, the market retreated each time. Sometimes small declines, sometimes large declines…..but fell 11 out of 11 times. Expect volatility to surface in 2022. Last week was not the first time we will hit speed bumps this year in the equity market. Expect volatility, embrace volatility, do not fear the volatility when it surfaces.
| Big Year | Price % Gain | Next Year% Gain | Early Year Drop | Early Year Date |
|---|---|---|---|---|
| 1980 | 25.8 | -9.7 | -6.7 | 2/19/81 |
| 1985 | 26.3 | 14.6 | -3.7 | 1/22/86 |
| 1989 | 27.3 | -6.6 | -8.6 | 1/30/90 |
| 1991 | 26.3 | 4.5 | -5.4 | 4/8/92 |
| 1995 | 34.1 | 20.3 | -2.8 | 1/10/96 |
| 1997 | 31.0 | 26.7 | -5.1 | 1/9/98 |
| 1998 | 26.7 | 19.5 | -1.6 | 1/14/99 |
| 2003 | 26.4 | 9.0 | -2.5 | 5/17/04 |
| 2013 | 29.6 | 11.4 | -5.8 | 2/3/14 |
| 2019 | 28.9 | 16.3 | -30.8 | 3/23/20 |
| 2021 | 26.9 | ? | ? | ? |
| Median | 26.9 | 13.0 | -5.2 |
Richard Barrett
Chief Investment Officer
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