With the S&P 500 up a solid 25 percent year-to-date, it will almost certainly deliver a third consecutive year of double-digit returns (2019: +31 pct, 2020: +18 pct). That would mark only the 10th time the index has done so over the past +90 years. There’s good reason for why such sequences are uncommon. Markets discount the future very efficiently, so a 3-peat of +10 percent annual returns is unusual as it is difficult to surprise markets for three straight years. It’s much more common to see two consecutive years of double-digit returns sporadically sprinkled throughout a cycle.
Even still, the S&P has produced positive double-digit returns for three years in a row during 9 periods prior to 2021. These 3-peat clusters span all the way back to the early 1940s-1950s and mid-1960s to the late 1990s and mid-2000s. The average total return for the third straight year of double-digit gains is 22.8 pct, just below the S&P’s price return of 24.8 pct YTD.
So, what can we expect for 2022? A few points:
- In the year after the S&P has had 3 years of positive double-digit returns in a row, the index went on to produce an average total annual return of 8.4 pct. Five of these years were positive and four were negative.
- The S&P has registered a 4th straight year of positive double-digit returns 4 times since 1928. These include 1945 (+35.8 pct), 1952 (+18.2 pct), 1998 (+28.3 pct) and 1999 (+20.9 pct). The average: +25.8 pct.
The last positive (but not double-digit) year after a 3-peat of +10 pct returns was in 2015 (+1.4 pct).
- After the other 4 times when the S&P registered 3 consecutive years of double-digit returns, the index went on to have negative returns. These include: 1946 (-8.4 pct), 1953 (-1.2 pct), 1966 (-10.0 pct) and 2000 (-9.0 pct). The average: -7.2 pct.
Here are our takeaways from this data:
#1: While a third year of positive double-digit returns for the S&P is rare, when they occur they tend to be especially strong as was the case this year. That’s because they typically come amid easing financial conditions and improving earnings such as during the bull run of the 1990s or after the Financial Crisis. The S&P rallied during 2019 (+31.2 pct) and 2020 (+18.0 pct) due to Chair Powell’s pivot to lower rates in the former’s case, and an accommodative Fed and robust fiscal stimulus in the latter’s case. Still-easy monetary policy and consistent beats versus corporate earnings expectations explains this year’s return.
Conversely, next year’s performance will largely stem from how the market discounts 2022’s economic growth and US corporate earnings given the Fed’s now hawkish messaging.
#2: History shows the odds of this year’s positive momentum carrying into next year is a coin toss. But when it does, the S&P tends to be up by another solid double-digits (4 out of 5 positive 4th years after 3 straight years of double-digit gains, +26 pct on average on a total return basis). These came during wartimes (i.e. WWII and Korean War) and the economic expansion of the late 1990s.
The one exception for a positive 4th year not in the double digits was 2015 (+1.4 pct). As for a fifth year of positive double-digit returns in a row, that’s only happened once: 1999 (+20.9 pct).
#3: The S&P does not tend to aggressively mean revert after a 3-peat of +10 pct annual returns. Out of the 9 times the S&P had 3 years of consecutive double-digit returns, it was down the next year 4 times with returns ranging from -1.2 pct to -10.0 pct. By contrast, during the 5 times the S&P was up in the 4th year, it’s positive returns ranged from +1.4 pct to +35.8 pct.
Bottom line: history shows three years of especially robust S&P returns does not portend a nasty downdraft/crash in the subsequent year. If anything, the S&P’s performance in the fourth year after a 3-peat of double-digit returns has proved asymmetric, whereby positive returns have been much larger than negative returns. As much as knowing when to sell is important to a portfolio’s performance, so is holding onto winners long enough to realize their full upside potential.
Link to total returns data from NYU Professor Aswath Damodaran: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html