Markets & Finance

The Odds Favor Gains


By Joseph Lisanti The S&P 500 has declined for three consecutive years. As we have noted before, this is the first time the market benchmark has fallen for that many years in a row since 1941.

But that statement obscures the reality that down years in the market are generally few and far between. Of the 57 complete market years since the end of World War II, the "500" has fallen in only 17, or less than 30% of the time. Because one of those years was 2002, we have subsequent-year data for 16. Only in three of the subsequent years, or about 19% of the time, did the market continue to decline. And two of those three occurrences were 2001 and 2002.

In the 16 one-year periods following full-year declines, the average gain in the index was 12.4%. That is significantly better than the 9% average annual gain in the S&P 500 since the end of World War II.

Does that mean that the market has to go up this year? Of course not, but the odds favor an up year. Consider that the last time we had four consecutive down years in stocks was in 1932.

As difficult as things look today, they are not nearly as bleak as in that Depression year, when industrial production fell more than 65% and car sales declined 80% from their 1929 peak levels. In 1932, between 15 million and 17 million people were unemployed when the total population of the U.S. was less than 125 million.

We can't know the timing of events that could spark renewed interest in stocks. But investors eventually will sour on alternative choices since 10-year Treasury notes yield less than 4% and money market funds, at less than 1%, don't even keep up with inflation before you consider the effect of taxes on your returns.

Keep 65% of your investment assets in stocks, 15% in bonds and 20% in cash equivalents. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook


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