THE BREW – MARCH 2024

PUTTING THE RECENT RALLY IN CONTEXT?

As of the end of February, the S&P 500 gained 28% over the past year, well above the average annual gain of 9% since 1950. That said, the recent rally is not without precedent. You would only have to go back to August 2021 to find a larger 12-month rally, up 29%.

While rallies of this magnitude are not common, they aren’t exceedingly rare either. When we compare the current rally to the history of 12-month returns, it ranks in the 90th percentile.

The rolling 3-year return of 10.2% (annualized) ranks in the 60th percentile. It’s respectable, but not remarkable, similar to the 5-year (78th percentile) and 10-year periods (68th percentile). So, while equity markets have rewarded long-term investors over the last 10 years, the returns are only modestly better than average.

Importantly, big gains in one year do not necessarily predict future weakness. In fact, there is little if any relationship between the returns of one year to the next. The chart below shows the relationship between the trailing and forward 12-month return for the S&P 500 since 1950.

We’d argue there is not a meaningful relationship that investors should rely on. Most of the dots are clustered in the top right quadrant because the stock market tends to rise most of the time.

However, it’s worth noting that this year is off to an unusually calm start. It’s been more than four months since the S&P 500 experienced even a 2% decline. Historically, we’ve averaged a 2% decline once per month since 1950.

So, while we welcome the strong start to the year, we should manage expectations for what the rest of the year may hold. History suggests we’ll get some bumps along the way, and that’s perfectly normal.

After any outsized market move, review your asset allocation with your SEIA advisor to help ensure alignment with your long-term financial plan. A simple rebalance offers an easy way to sell assets that have appreciated (sell high) and reinvest into assets that have underperformed (buy low).

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