Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.” Nowhere is that statement more true than in the stock market. Amidst slight nuances, you’ll often find repeating patterns based on historical performance that, when followed, can be a powerful trading and investing utility. For instance, take a look at the average monthly performance of the S&P 500 over the last several decades, compared to the S&P’s monthly performance in 2023.
See the pattern? Here they are overlaid.
While the movements of the S&P in 2023 are much larger by percentage (measured in the right hand column), the directional movement is very similar. September is commonly the worst performing month of the year and September was the worst performing month in 2023. January and November are typically positive, outperforming months — and they were in 2023 as well. The final three months of the year usually mark a turnaround from September’s bearish action, and that happened in 2023 too.
In fact, if we hone even more, we’ll see this even matches up from a week-to-week perspective in certain cases. Take a look at this chart of weekly “S&P win percentages” from TrendSpider.
This chart identifies a two week period in September which is notorious for being the worst two weeks for the S&P on a performance basis. During that period in 2023, (the final two weeks of September) the SPY lost -3.5%, responsible for more than half of the losses in what turned out to be the SPY’s worst performing month of the year.
Are you starting to see a trend? The stock market is all trends. If you can identify the trends and patterns, you can become a better, more accurate trader.
Now, let’s look at 10 different strategies we can identify if historical data holds true.
1. If This is An Average Bull Market, the SPY Will Rise to 960.07.
Since October 1957, there have been 12 bull markets (including this one). On average, when calculating the percentage gains of those bull markets, the average gain is +169.26%. That means, if we extrapolate this average from the beginning of our October 2022 bull market (where the S&P 500 was trading at $356.56), the S&P 500 should reach a price of $960.07 by the end of the bull market. Here’s what all of those bull markets look like:
If that sounds far fetched, let’s make sure to check our biases at the door, many of which are picked up from smart sounding Wall Street analysts. Wall Street analysts are famous for being wrongly bearish all the time. By spreading that message, they cause market participants to think that market rallies aren’t somehow foolish to believe in. It isn’t hard to find an analyst or a social media personality blaming recent rallies on the Fed’s “free money era” or hype around a particular sector or market exuberance. One glance at Fintwit, and you’ll see plenty of commenters drawing false comparisons to the dot-com era. I don’t give financial advice, but if there was one piece of financial advice I could give, it would be that if you care about investing or trading, you should ignore these people like your life depends on it.
Because they’re just plain wrong. If you look at the current bull market, stocks are up 31.8%. If this is the top, this will be the second smallest bull market ever. And seeing it broken down in chart form should make it clear that this is nothing like the dot-com bubble, where stocks rose 582% without a single bear market. If this were going to be the dot-com bubble, then great — I’ll see you when the S&P 500 is at $20,751.8. That’s what a 582% rally would look like. That’s not going to happen, because this isn’t the dot-com era. Our last bull market and this one have been below average bull markets, and bears are just plain getting it wrong.
Now, there’s an important caveat we have to put on this call for the SPY to rally to $960.07.
2. The Average Bull Market Lasts 59 Months, Meaning This One Could Last Until September 12, 2027
Now that call sounds more reasonable. The average bull market lasts 59 months. If you look elsewhere across the web, there are varying accounts of this average date ranging as low as 9 months — however, to be clear, that’s because they’re using different datasets. In this study, we’re using 1957 to present as our statistical benchmark because prior, the S&P was not known as the “S&P 500” — it was the “Standards and Poors” which covered 223 companies. The S&P 500 became what it is today in 1957, and forgoing some earlier data will likely skew the results of these averages. That said, considering the index more than doubled in its quantity of stocks, we think it’s more accurate to consider only the S&P 500 in its current form — not the S&P 223.
Now, considering the average bull market length in this study (59 months), that would mean this bull market will last until September 12th, 2027 if it is an “average” bull market. But what do we do with that information? The historically correct answer to that question would be to invest, and ignore the doomsayers and bears. It isn’t “different this time” — it never is. The stock market is essentially an inflating asset class and the S&P 500 has historically always paid those who were patient enough to wait.
Here’s a quick history of all 12 bull markets we’ve been looking at.
That said, most of these conclusions really only benefit long timeframe investors. What about more mid-term investors and even traders? What conclusions can we draw for them?
3. The Largest Average Pullback During a Bull Market is -13.2%
If you’re a trader, then you probably already know that in a bull market, you largely should focus on bullish strategies. In a bear market, you largely should focus on bearish strategies. That seems simple enough, but when the market gets volatile, it can get a little cloudy. What looks like a dip-buying opportunity in a bull market to some could look like the beginning of a bear market to another. So here’s one metric to keep in your back pocket during the early innings of a bull market like this one, where we are far from the average length or average gain that most bull markets experience:
The largest average pullback during a bull market is -13.2%. This metric identifies the largest drawdown during a bull market that recovered without reaching -20%, which would effectively end the bull market. In other words, the average bull market experiences a “correction” that does not ultimately end the bull market. For longer time frame swing traders, you can use this metric as a reminder that a “correction” (a drawdown of more than 10% but less than 20%) is more often than not an excellent buying opportunity, especially if your time duration is long enough to capture it. Notably, 10 of the 12 bull markets between 1957 and present day have seen a 10% or more correction.
One of them just happened recently in 2023: To cap off the first year of the S&P 500’s latest bull market, the stock market corrected -10.15%. The correction lasted 13 weeks, and for some it was very painful. But what happened afterwards?
In just 9 weeks, the S&P 500 had repaired the damage and then some, rising a total of 15.85% over the period, surpassing the highs of the correction in the process. Buyers who picked up bullish positions in the S&P when this reached 10% correction territory didn’t have to take much heat — the stock market turned around immediately. Historically, buyers have had to take an average of -3.2% on top of the -10% correction before stocks started turning around. However, for those patient enough, that turnaround has always been worth the wait thus far.
Here’s one more piece for both investors and traders alike: Annualized average bull market gains.
4. The S&P 500’s Annualized Gain if This Truly is an “Average” Bull Market
If this bull market truly is average in terms of return and duration, then we can expect annualized returns of roughly 22% per year throughout this bull market, which makes 2023’s return of 24.29% relatively average. That means if we have an “average year” in an “average bull market” using the statistics we’ve described, we can expect the S&P 500 to end 2023 at a value of roughly 5,819. This might sound like a lot, but as we’ve said, this is all based on historical data — and additionally, this would be a smaller move than 3 of the past 5 years in absolute terms.
So it stands to reason that if history repeats, we will likely experience another move of a similar size.
Lastly, let’s look at one more historical metric:
5. How Common Are Negative Yearly Returns in the S&P 500?
As we’ve said, the S&P 500 has always paid those who were willing to wait long enough. But how long is “long enough?” How common are negative years in the S&P 500?
Here they all are, from 1957 to present. Note that a red candle does not necessarily indicate negative returns — in 1984, the market opened the year high, then closed lower than it opened, forming a red candle. However, yearly performance is based on the close of the prior year to the close of the current year — and in 1984, despite the red candle, the S&P was actually up +1.40%. As you can see above, odds of a negative year are about one in four, with 19 occurrences in the past 67 years, and an average performance of -12.71%.
One important thing to note is that the year following a red year is typically positive — 84.21% of the time, with an average return of +14.07%. So if you’re investing in the S&P 500, here’s a simple rule of thumb: when in doubt, stick it out (if you believe in the power of historical data).
What Have We Learned?
Warren Buffett once said, “The most important quality for an investor is temperament, not intellect.” Much to the dismay of the Wall Street elite, we see that reflected in the performance of most money managers every year. While there certainly are ways to trade smarter (and it’s something we at Market Rebellion specialize in) often, investing is better done simply. The reason the S&P 500 has such an incredible track record is because it’s constantly shifting and changing shape through a practice called rebalancing.
Index rebalancing is the act of changing the composition of an index based on certain criteria. For a tech index, it might be that a company is expanding outside of technology or changing their focus to a different service and no longer is well suited for the ETF in question. For the S&P, there are several criteria that must be met in order to be included in the most prestigious index in the U.S. To be included:
- A company should be a U.S. company
- Have a market cap of at least $8.2B
- Be highly liquid
- Have a public float of at least 50% of its shares outstanding
- It’s most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive
When companies no longer meet this criteria, they are often removed from the index to make room for other companies. As the S&P continues to re-evaluate the profitability, consistency, size and liquidity of its 500 components, it ensures its ability to stay relevant and successful through the many changing metas of the market. That’s why the S&P 500 is considered by many to be the single best investment tool in the U.S. stock market.
But that’s beside the point. whether you invest in the S&P, or a handful of companies you believe wholeheartedly in, the most important takeaway from this article is that the broad market is more stable than most of Finance’s notable figures will have you believe. In part, this is by design. If the “smartest people in the room” are constantly fearmongering about the stock market, more individual investors will be scared away from managing their own funds. And in part, it’s because the human mind is programmed to prefer avoiding pain rather than gaining pleasure — leading investors to forget the many lessons of the past and to instead focus on the potential boogeymen lurking in the dark corners of the room.
Hopefully all of the historical analysis we’ve provided here will help you avoid caving into those fears and market naysayers the next time one of your investments starts trading in the red or enters a correction. After all, that dip could end up being an incredible buying opportunity.