Does A Reversion To The Mean Follow Big Up Years?

With just a few hours left in the trading day, the S&P 500 is on track to deliver a hefty gain of over 20% to investors for 2017 and the ninth straight year of gains on a total return basis. In the S&P 500’s history, there has only been one other period where the S&P 500 was in the black for nine straight years, and that was from 1991 to 1999. A big difference between that streak and now, though, is the magnitude of the gains. During the 1990s streak, the S&P 500’s total return was 450% compared to a relatively meager gain of 261% in the current period. If the S&P 500 does make further gains next year, it will be the first ten-year winning streak for the index ever. With such a big gain this year, though, can investors really expect to see gains in the year ahead?

Looking back at the S&P 500’s historical total returns, there have been 32 prior years where the index was up 20% on a total return basis. What’s stunning about this number is the frequency of these types of big years. In fact, there have been 33% more years where the S&P 500 was up 20% or more than years where it was down! The table below lists every year since 1928 where the S&P 500 was up over 20% on a total return basis along with how the index performed in the following year. In the year that followed these ‘big’ years, the index saw an average gain of 10.46% (median: 12.80%) with positive returns just over two-thirds of the time. What’s pretty surprising about these prior returns is that they are only modestly below the average (11.85%) and median (14.30%) total returns of the S&P 500 following years where the index was not up 20% or more. So if it’s a reversion to the mean you are expecting following this year’s big gain, you may be disappointed. In fact, there have been five periods where a 20%+ year was followed by another 20%+ year, and in one of those five periods, the 20%+ year was followed by another four 20%+ years!