The Market: Ready to Pop

Signs are everywhere that Americans have tired of playing the “long game” in dealing with the global financial crisis that erupted seven years ago. One way to judge how satisfied (or not) society is with the current condition is by the choices it makes. And right now, those choices are telling us that most people have had enough:

  • A populist presidential candidate, Donald Trump, is trouncing his GOP rivals in the polls with his constant reminders that he will “Make American Great Again.”
  • A reboot of the Star Wars movie series subtitled “The Force Awakens” is setting box office records as it rekindles nostalgia for a stronger America.
  • Enabled by low gas prices, sales of expensive SUVs and trucks have spiked as evidenced by a 79% jump in sales by Land Rover in November of 2015 compared to a year earlier.

Of course, each of these could be ephemeral: Trump may not win his party’s nomination, much less the general election; in a few months another hot movie may take the nation by storm, drowning out memories of Star Wars; and when oil prices eventually rise, many of those SUV owners will regret owning a gas guzzler.

But the good news for investors is that plenty of historical precedent exists to suggest that 2016 and 2017 will be much better years for the stock market than 2015, which delivered the “sideways” stock market we predicted at the onset of the year with little net change in value.

So why is a flat year like 2015 something to celebrate?

It’s rare that the stock market exhibits no net change for the year, but not unprecedented. In fact, it was only four years ago that the index ended the year almost precisely where it began.




And way back in 1970 it gained only 0.1% for the year, the only other time over the past 45 years that it ended the year less than 1% from where it started.

In both cases the index gained more than 10% the following year, and more than 25% by the end of the second year. That’s a statistically insignificant sample size, but if we expand the pool to include years in which the index changed no more than 2% in value the pattern remains the same: 1978’s return of +1.06% was followed by returns of 12.3% and 25.8%; 1984’s return of +1.4% was followed by returns of 26.3% and 14.6%; 1987’s gain of 2.0% preceded gains of 12.4% and 17.2%; and 1994’s loss of 1.5% was followed by huge gains of 34.1% and 20.3%.

On average, those six flat years were followed by two-year periods that produced an average gain of 40.2% in the S&P 500 Index, with a minimum gain of 25.1% and a maximum of 54.4% (those figures do not include dividends, which would add another 4% to 5% to those amounts). Not only has there been no exception to this pattern, but the size and timing of the returns have been remarkably consistent.

Perhaps all of that is just coincidence, with each three year period affected by a unique set of circumstances. However, a more likely explanation is the economic conditions that produced each flat year resulted in a renewed appreciation for the long term appreciation potential of equities compared to bonds or cash.

If so, then it shouldn’t be long until the stock market shakes of the winter blahs and begins marching higher. To be sure there will still be some quick drops along the way, but unlike 2015 when the ups and downs cancelled each other out, in 2016 and 2017 the plusses should heavily outweigh the minuses. Happy New Year!