History suggests the odds are against 2023 being another bad year for stocks

Published Tue, Dec 27 20228:02 AM EST

There's a lot of anxiety about a recession in 2023 and the impact it could have on the stock market. The S & P 500 is already down nearly 20% for the year, which is historically very unusual. Could we have another down year in 2023? It's possible, but it is statistically unlikely. Let's review a little stock market history. Back to back down years don't happen very often Simply put, there has been only four times since 1928 where the S & P has been down two years or more in a row. Four years in a row: Once (1929-32) Three years in a row: Twice (1939-41, 2000-02) Two years in a row: Once (1973-74) Last time we had back to back down years was 2000-2002, when the S & P 50 dropped three years in a row. Drops of 20% or more are also very uncommon Let's take the definition of a "big" market decline as a 20% drop in the market, regardless of the time period. Since the end of World War II, there have been only 13 peak-to-trough declines of 20% or more in the S & P 500, and most of them have been 20%-30% declines: S & P 500: 20% declines are not common (peak to trough declines, since 1945) Down 20%-30%: Seven Down 30%-40%: Three Down 40-50%: Two Down 50% +: One Source: Yardeni Research That includes this year's decline of 25% from Jan. 3-Oct. 12. The more serious declines of 30% or more have centered around very large and unusual "shocks": the 1973 oil crisis, the bursting of the dotcom bubble in 2000 and 9/11, the Great Financial Crisis of 2008-2009, and the Covid pandemic in 2020. In most cases, the S & P was back to break even roughly a year after the trough. Long-term, the stock market tends to go up The reason buy-and-hold investing works is that long-term, the stock market has always risen. The S & P 500 on average has gone up nearly three out of four years. S & P 500 year-over-year returns (since 1928, including dividends) Up: 72% Down: 28% During that 94-year period, the S & P 500 has averaged a yearly return of 11.7%, again including dividends (not adjusted for inflation). There have been far more years with big advances than big declines It's not just that the market tends to go up over time, but that it advances at a greater pace. Not every year, but the trend is up. The gains and losses have not been evenly distributed: The S & P 500 has advanced 10% or more in a year 57% of the time, and declined 10 percent or more only 12% of the time: S & P 500 (percentage advance each year) 20%+ advance: 36% 10%-20% advance: 21% 0%-10% advance: 15% 0%-10% decline: 15% 10%+ decline: 12% Source: Dimensional Funds So is it possible 2023 could be another down year? Sure it is. The lingering effects of the pandemic, the continuing Russian invasion of Ukraine, and the Fed's continuing war on inflation could combine to make this one of those very unusual years that sees back-to-back losses. But the odds are against it.