My Sunday Washington Post Business Section column is out. This morning, we look at What’s gone up won’t always come down. The print version had the headline You might think the markets are ready for a breather after last year’s gains, but . . .

Here’s an excerpt from the column:

“You might think that after such a strong year, the markets might be due to “take a breather.” Perhaps a flat year is in order so last year’s gains can be “digested” — or so goes the popular assumption. And indeed, markets this year have ranged from flat to down a few percent. Some would go further and, because of the “Gambler’s Fallacy,” assume that markets are bound to go the other way and sell off.

Those assumptions would be wrong. The data strongly suggest that very good years in the U.S. stock market are followed by more good years. When we review both the Dow Jones Industrial Average and the S&P 500, we learn that the years that follow a 20 percent gain (or greater) are typically stronger than average.

There have been 22 instances where the Dow has risen 20 percent or more. In the year after, returns average 8.4 percent, beating the average 7.8 percent of the 90 years from 1924-2013.”>

There were a couple of great charts in the dead tree version of the paper:


click for larger charts
Dow 20 SPX 20



What’s gone up won’t always come down
Barry Ritholtz
Washington Post, April 20 2014

Category: Apprenticed Investor

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 “What Goes Up, Must Come Down?”

  1. marketmap says:

    A +20% year being a single variable of study doesn’t seem to lead to any conclusive statistical outcome
    (as with a majority of single variables data series presented in financial blogosphere) http://www.ritholtz.com/blog/2005/05/single-vs-multiple-variable-analysis-in-market-forecasts/.
    It’s the successive years each greater than the 40 year compound average growth rate of the SP 500 ( components 1&2 of the multi variable rule set shown in link below) that gets the “light bulb” going on.


    90 years graphical:


  2. ch says:

    Wow – look at those returns in 1933-34-35-36 – what happened there? Let’s ask Depression historian Ben Bernanke, who said this in 2002 in his famous “Deflation” speech:

    “Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.”

    When the value of the currency falls faster than the fundamentals of the economy, the price of risk goes up. What is happening in stocks is really that simple. Bernanke understands this. He told everyone what he was going to do 12 years ago in his Deflation speech.

  3. chartist says:

    The MACD for the SPX, on the monthly chart, has not been this high going back to 1994. The closest peak was 1999. The daily MACD looks to be turning up from just under the 0 line. The weekly will likely give a MACD non-confirmation if a new high is made on the SPX chart.

  4. Conan says:

    Here is another way of looking at the data:


    In particular look at Charts 3 & 4.

    • marketmap says:

      The trouble with Crestmont, and this type of nebulous valuation measure “eye candy” in general, is that if a tactical manager were to base their allocation decisions on these types of fundamental overvaluation measures since the mid – latter 90′s, then they would still be in cash and still waiting for an “undervaluation”. And would the undervaluation PE level be 9%? or 4% ? or 12%? Charles Allmon, famous value investor in the 80′s and the 90′s fell into this trap and stayed in cash. Whereas, even if one were to buy and hold a stable dividend growth aristocrat portfolio (divs reinvested, rebalanced annually) in the latter 90′s, they would be up hundreds of %.

  5. boveri says:

    Good input to support that the bull market should be given the benefit of the doubt going forward until the days that sustained bearish action proves otherwise.

  6. seneca says:

    In 2013, the DJIA went up 26%. Using the same table, there were 10 years that the DJIA gained between 24% and 28%. Half the following years were down years. This proves once again you can always find in the data whatever you are predisposed to find.