Annual_Price_Performance_800px
Source: 361 Capital

 

This chart comes to us via Blaine Rollins of 361 Capital. I find it provides great context for the current markets, especially given the amount of bubble chatter we hear these days.

How common are double-digit equity gains? How often do we see markets up 20 percent or more in a given year?

As it turns out, when markets are in the green, double-digit gains are the norm. Only one in four years where markets are positive do we actually record single-digit gainers. Indeed, three out of four positive years (19/76 or 0.25 percent) see gains that are in the double digits.

This year, the S&P 500 is up about 25 percent. How common are 20 percent plus years? As the distribution above shows, 20 percent or greater gains are surprisingly common. We have these sort of hot years about 30 percent of the time (34/115 or 0.295 percent of the time) — that’s almost one in three years since 1897 where we have seen markets up more than 20 percent.

We have been overdue for a correction of 10 percent or more for a while now. There is little doubt during this long market run, stocks have gotten pricier than they were, and sentiment has moved from disliking equities to warming up to them to becoming quite frothy. But none of these metrics suggest that the market is on the verge of crashing or even entering a bear market (down 20 percent or more).

Of the myriad reasons we could possibly see a correction beyond the pullback of the past five days, the markets’ year-to-date gains of double digits or even 20 percent are not one of them.

 

Originally published here

Category: Investing, Markets, Quantitative

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Bull or Bubble?”

  1. pyrrho says:

    …when markets are in the green…(?) I wish I could start my investment analysis with that assumption.

  2. kurtbox says:

    What does that have to do with a bubble? You could have single digit gains in a calendar year and be in a continuing bubble. Of course most gains and losses are double digit; the market is much more volatile year to year than people think. Misleading post at best.

  3. [...] Nice overview, but of course this does not tell you anything on what to expect in 2014… http://www.ritholtz.com/blog/2013/12/bull-or-bubble/ [...]

  4. If the question is “Bull or Bubble”, or in other words “will next year be up or down relative to this year?”, then one should look not just at the strong years, but also at the prior & following years as well.

    It seems like a fair fraction of the strong “20%+ years” are “snapbacks” when the market rebounded from oversold conditions created by major declines in the prior year. That’s not the case today, so one might be inclined to discount those. Four examples from the data provided include 1933, 1975, 2003, 2009… (that’s not an exhaustive study).

    Of the remainder of the “20%+ years” , a healthy fraction are “before the fall” years. By that I mean years whose strong returns are followed (within 1-2 years) by major market declines that wipe out the gains from the strong years. Seven examples from the data provided include 1927, 1928, 1936, 1973, 1980, 1985, 1998… (again, not an exhaustive listing).

    However, there are a few mid-stage bull-run years in the list as well, such as 1985.

    Overall this evidence is informative but not conclusive.