Wall Street bulls love the big gains in 2013. Through December 30, the Dow is up 25.95% on the year and the S&P 500 is up 29.95% from closing prices on December 31, 2012. They shouldn’t get their horns pointed too far northward, though, because the stats say, while things look very optimistic for profits again in 2014, those gains won’t match the market rise this year.
Now, while the argument can be made that higher prices make it harder for percentage gains to be matched – and that’s a fair argument – percentage gains are what it is all about. With that, the numbers show that the robust gains in 2013 will fall prey to diminishing returns in coming years, if the numbers hold true.
Let’s just assume that the Dow doesn’t have some berserk day to rise more than 4 percent on Tuesday and that it doesn’t lose enough to drop under 25 percent gains for the year (which means a fall to 16,379 from Monday’s close at 16,504), so we’ll base this analysis on those premises. Since 1975, the Dow and S&P 500 have only risen in tandem more than 25% in a year five times (1975, 1985, 1989, 1995 and 2003). We’ll focus on those years.
Following those stellar years, the markets generally advanced in the subsequent year, but with smaller returns in every instance (in 1995, both were up more than 30%), including the plunge into negative territory in 1990. The following graph details how much.
In the next year, the gains got smaller, yet again, in 3 out of 5 years (60% of the time):
Now, not to get all “Negative Nelly” about the situation, but in the third year from both the S&P 500 and the Dow rising jointly more than 25%, there has only been one year since 1975 that the indexes have risen more than 15% each. In the other cases, the third year produced gains for the Dow and S&P 500 that exceeded 10% each twice, and the other two times the advance was less than 5% each.
On the bright side, given the limited sample size, the odds are 80% that the Dow and S&P will produce gains again in 2014 and things generally look good for more advances in 2015 and 2016, just don’t pin your hopes too high because gains like in 2013 tend to come around about once every 8 years.