What to Expect After Market Returns of 20% or More?

When market returns are well above the average there is likely to be a reversion to the mean but as a long-term investor what should you expect?

There have been 34 times since 1926 that the S&P 500 has returned 20% or more through 2018. The average total return since 1926 through 2018, for 5-year holding periods following market returns of 20% or more is 7.9%. After 1950, the average total return for 5-year holding periods following market returns of 20% or more is 10.4%.

As for percentile ranks, since 1926, a return of 9.9% represents the 50th percentile for 5-year holding periods following market returns of 20% or more. Returns of 3.8%, 8.2%, and 14.9% represent the 25th, 35th and 75th percentiles, respectively.

Consecutive returns of 20% or more are not very common but from 1995 through 1999, the market returned 20% or more for 5 years in a row. What’s likely for the next 5 years? Considering the current market cycle, my guess would be that we will experience returns closer to those between the 50th and 75th percentiles.