Historical review of years following strong gains and shallow pullbacks support our 2022 outlook

Market Perspectives

December 31, 2021

What happened?

Stocks truly had a remarkable year in 2021—not only in terms of the robust gains generated but also in the lack of any significant pullbacks for the S&P 500 in a year of an ongoing pandemic.

Indeed, the S&P 500 is currently up 29% on a total return basis (including dividends) for 2021. This is only the 18th time since 1950 that the market has risen by at least 25%. Equally impressive, the deepest intra-year market pullback was only 5% versus a historical average of 14%.

Key takeaways

  • Stocks had robust gains and unusually shallow pullbacks in 2021.
  •  After 25%-plus total return years, the S&P 500 rose the next year in 14 of 17 instances, or 82% of the time.
  • Likewise, a price-based momentum signal for the S&P 500 was recently triggered that has been followed by positive one-year returns in 35 out of 36 past instances, or 97% of the time.
  • Following the 10 years with the shallowest intra-year pullbacks, stocks tended to see deeper setbacks and more modest annual gains in the next year.

Looking forward

The question becomes what, if anything, can the past year tell us about the market’s potential in 2022. In today’s note, we provide three studies for perspective. The results are generally supportive of the 2022 outlook we laid out in early December, positive yet realistic.

In our first study, we review all years since 1950 in which the S&P 500 had a total return of at least 25%. In the following year, stocks rose in 14 of those 17 instances, or 82% of the time, with an average gain of 14%.

Two of the three years where stocks failed to rise, 1981 and 1990, coincided with recessions. Our work suggests near-term recession risk remains low. The other downside market outlier was 1962, which was challenged by a flash crash and deteriorating investor confidence. Still, overall, stocks have shown a strong tendency to rise in the year following robust market gains, albeit at a more modest pace.

To read the publication in its entirety, please click the button below "Download PDF".

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