It’s been a banner year for stocks. Despite five-plus months of stagnation starting in May, the stock market closed out the decade with one of its best years this century. With a 28.5% return (through the first couple hours of trading on Dec. 30), the S&P 500 had its second-best year since the turn of the century, just shy of the 29.6% return in 2013.
Does that mean we should expect a big comedown in 2020? Let’s look at what past big years for the stock market have meant for the following year.
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Here are the last five years in which the S&P 500 has exceeded a return of 25%, starting with the most recent occasion:
2013: 29.6%
2003: 26.4%
1998: 26.7%
1997: 31.0%
1995: 34.1%
And here’s what happened to the market the following year (you’ve already seen one result):
2014: 11.4%
2004: 9.0%
1999: 19.5%
1998: 26.7%
1996: 20.3%
All of them were up years! Average return in those “hangover” years? 17.4%. None of those years managed to exceed their predecessors’. But there wasn’t a steep drop-off either. After really big years, stocks tend to have so much momentum that it carries over into the following calendar year.
What to Expect from the Stock Market in 2020
I’d expect more of the same from the stock market in 2020.
For starters, unlike those roaring late-1990s (five straight years of 19% gains or more!), 2019 came on the heels of a down year for the market; the 6.2% decline in the S&P in 2018 was the index’s worst performance since the infamous subprime mortgage collapse year in 2008.
Second, 2018 was the second down year for the market in a four-year stretch—the only time that’s happened since the 1970s, with the exception of the dot-com bubble burst from 2000-2002.
Furthermore, in the last 15 months—dating back to the late-September 2018 highs around 2,930—the S&P is up a mere 9.9%. It’s up just 11.7% if you go back to the January 2018 highs.
That’s cherry-picking a bit, I realize. So maybe this two-year chart of the S&P will paint a fairer picture:
In essence, stocks didn’t truly break to new highs until November; the huge upmove in the first four months of this year was merely a recovery from the disastrous fourth-quarter 2018 market correction that preceded it. Thus, the real rally is just two months old!
Mike Cintolo, our resident expert on historic stock market trends and chief analyst of our flagship Cabot Growth Investor advisory, recently wrote his subscribers about the freshness of this market rally. Here’s a snippet of what he had to say:
“It’s fair to say that the odds favor a trickier environment in the weeks ahead; whether it’s a pullback, choppy sideways action, rotation, etc., it’s unlikely (though not impossible) the market simply kites higher for another month or two.
“However, the good news about the recent advance is that it likely portends good things down the road: We’re viewing the action since early October (when the market got going from both a five-month range this year, and a 20-month sideways period dating back to January 2018) as more of a kickoff that bodes well when looking out a few months. Thus, barring a massive change in character (huge meltdown), the odds strongly favor higher prices in the months ahead.”
Bottom line: January could be a bit rocky, with stocks coming down from all-time highs after advancing for three straight months. But it won’t be a traditional January Barometer; 2020 won’t go as January goes. This time a year from now, expect stocks to be up—probably up double digits again, if history is any guide.
That’s my stock market prediction for the year. So get all your tax-loss selling done now. And get ready to buy stocks again in the New Year—even after a monster year for the market.
And if you need a little help picking which stocks to buy, click here.
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