The future isn’t dictated by the past. But there are lessons to be learned by looking back.
There’s a lot of pessimism among investors as we approach another new year. 2022 brought the first sustained bear market in more than a decade. Inflation remains at the highest level in 40 years. Big companies are laying off workers. Consumers are pinching their pennies.
But an old saying comes to mind: It’s always darkest before the dawn. Even a cursory examination of the past shows that the stock market can quickly turn around. Is a bull market on the way in 2023? Here’s what history shows.
The bounce-after-bad-year trend
The S&P 500 is on track to finish 2022 down close to 20%. That has happened only six times since 1928, and in four of those cases, the index delivered a return of more than 20% in the following year.
| YEAR | S&P 500 DECLINE | S&P 500 CHANGE IN THE NEXT YEAR |
|---|---|---|
| 1930 | (28.5%) | (47.1%) |
| 1931 | (47.1%) | (15.2%) |
| 1937 | (38.6%) | 25.2% |
| 1974 | (29.7%) | 31.6% |
| 2002 | (23.4%) | 26.4% |
| 2008 | (38.5%) | 23.5% |
Note that the two exceptions — when the S&P actually declined during the year after closing down by at least 20% — occurred during the early part of the Great Depression. A lot has changed since then, notably a huge increase in retail investors.
There’s also a distinct bounce-after-bad-year trend on an overall basis after the end of the Great Depression. The S&P 500 finished in negative territory 23 times between 1940 and 2021. In 19 cases, the index was up the next year.
| YEAR | S&P 500 DECLINE | S&P 500 CHANGE IN THE NEXT YEAR |
|---|---|---|
| 1940 | (15.3%) | (17.9%) |
| 1941 | (17.9%) | 12.4% |
| 1946 | (11.9%) | 0.1% |
| 1948 | (0.7%) | 10.3% |
| 1953 | (6.6%) | 45% |
| 1957 | (14.3%) | 38.1% |
| 1960 | (3%) | 23.1% |
| 1962 | (11.8%) | 18.9% |
| 1966 | (13.1%) | 20.1% |
| 1969 | (11.4%) | 0.1% |
| 1973 | (17.4%) | (29.7%) |
| 1974 | (29.7%) | 31.6% |
| 1977 | (11.5%) | 1.1% |
| 1981 | (9.7%) | 14.8% |
| 1990 | (6.6%) | 26.3% |
| 1994 | (1.5%) | 34.1% |
| 2000 | (10.1%) | (13%) |
| 2001 | (13%) | (23.4%) |
| 2002 | (23.4%) | 26.4% |
| 2008 | (38.5%) | 23.5% |
| 2011 | (0.1%) | 13.4% |
| 2015 | (0.7%) | 9.5% |
| 2018 | (6.2%) | 28.9% |
The average increase for the S&P in the year after a decline is 12.8%. In most cases, the index went on a multi-year run following a down year. That was especially true during the Great Recession when the steep market decline lasted from late 2007 through mid-2009. Stocks subsequently entered the longest bull market in history.
The year-of-a-recession pattern
Speaking of recessions, though, there are widespread concerns that a recession could be on the way: A whopping 98% of CEOs surveyed recently by the Conference Board think that the U.S. economy will enter a recession within the next 12 to 18 months. This pessimism isn’t limited to top executives. A Bloomberg News survey conducted earlier in December found that four out of five economists expect a recession in 2023 or 2024.
How has the stock market performed historically during recessions? Not good. The following chart tells the story. The periods when the U.S. economy was in a recession are shaded in gray.
^SPX DATA BY YCHARTS.
The S&P 500 fell during most recessions. In some cases, the decline was especially steep. However, stocks don’t always sink during recessions. For example, the S&P 500 rose during the recessions of 1980 and 1990-1991.
A 2023 bull market?
So will there be a bull market in 2023? The historical precedents are unclear. While it’s true that the S&P 500 does usually climb after experiencing a down year, it doesn’t always do so. And if a recession is right around the corner, the odds that the stock market will fall seem pretty high.
Similarities between our current conditions and past periods exist. For example, the United States had high inflation in the 1970s and early 1980s. But there are also factors in play in today’s economy and the stock market that are different from those we’ve seen in previous years.
The potential for a bull market in 2023 depends much more on how events next year unfold than on what has already happened. Bottom line: The future isn’t dictated by the past. However, a bull market will come sooner or later. The present market decline could offer a big opportunity for patient investors.
