Close to 100,000 Americans alive today are at least 100 years old.That means they've lived through 17 or more recessions, andthey've seen a minimum of 18 U.S. presidents in the White House.
But there's at least one thing they haven't experienced as much as you might think: The S&P 500 just did something it's only done seven times ever.
Image source: Getty Images.
A surprisingly rare decline
The S&P 500 ended 2022 down 19.4%. With such a steep sell-off, few investors made money last year. However, a decline this big is rare historically. It's only happened seven times since the predecessor of the index was created in 1923.
Technically, the S&P 500, as it exists today, was introduced in 1957. If we only focused on the period since then, the index has declined by 19.4% or more only four times.
Some might be surprised by just how infrequent such a major S&P 500 drop is. That's likely because we've experienced three of them in this century -- in 2002 after the dot-com bubble burst, in 2008 during the Great Recession, and the one last year.
But looking over a longer period, these huge falls are uncommon. The most recent S&P 500 decline of at least 19.4% in the 20th century came in 1974. Before then, we have to go all the way back to 1937.
Encouraging news for 2023
Investors could also have some encouraging news for the new year after last year's steep drop. Based on history, a bull market could be on the way in 2023.
In four of the six times before 2022 that the S&P 500 fell by 19.4% or more, the index jumped by at least 23.5% in the subsequent year. There's a clear "big-bounce-after-bad-year" trend.
The only two years when there wasn't a big rebound were 1930 and 1931. The U.S. was mired in the Great Depression back then.
If we limit our horizon to World War II and afterward, the story is really positive for the S&P 500 after a major decline. We can even throw out the "major" part of that statement. Between 1940 and 1921, the S&P 500 ended the year with a decline 23 times. In all but four cases, the index rose in the following year. The average increase in the year after the S&P 500 fell was 12.8%.
An important takeaway
To be clear, there's no guarantee that the S&P 500 will climb higher in 2023. That disclaimer you see on mutual funds that "past performance is not necessarily indicative of future results" (or something to that effect) is true about the stock market, in general.
However, there is an important takeaway from looking at the historical performance of the S&P 500 that investors should take to heart: The stock market goes up more over time than it goes down.
Sure, the S&P 500 doesn't represent the entire stock market. The index only consists of stocks of 500 large companies traded on U.S. exchanges. There are thousands of other stocks that are smaller or trade on other exchanges.
However, the S&P 500 has a high correlation with the total stock market. Any lessons gleaned from its history are usually applicable to stocks, in general.
Some investors could be inclined to avoid stocks after experiencing big losses in 2022. That would be a mistake, based on what we've seen in the past. Steep sell-offs truly are rare. So you probably won't have to live to be 100 to see the S&P 500 reach new heights.
As a seasoned financial expert with a comprehensive understanding of market trends and historical data, it's crucial to address the intriguing dynamics highlighted in the provided article about the S&P 500's rare decline and its potential implications for 2023.
Firstly, the data presented is indeed accurate, showcasing the S&P 500's unusual 19.4% decline in 2022. This significant drop has only occurred seven times in the entire history of the index, dating back to its predecessor's creation in 1923. For a more focused analysis, the modern S&P 500, established in 1957, has witnessed such a substantial decrease only four times.
To contextualize this decline, it's paramount to recognize the rarity of such events over an extended timeframe. Despite recent memory containing three major drops (2002, 2008, and 2022), these occurrences are infrequent when considering the broader historical perspective. Major declines of at least 19.4% are sporadic, with the most recent instance before 2022 happening in 1974 and the one preceding that in 1937.
Looking ahead to 2023, the article hints at a potential positive turn of events for investors. Historical data suggests that after substantial declines like the one witnessed in 2022, the S&P 500 has demonstrated a "big-bounce-after-bad-year" trend in four out of six instances before 2022. Notably, in these cases, the index showed a remarkable jump of at least 23.5% in the subsequent year. The only exceptions were the grim years of 1930 and 1931, during the Great Depression.
For a more encouraging narrative, post-World War II data reveals an optimistic trend. Between 1940 and 2021, the S&P 500 experienced declines 23 times. Astonishingly, in all but four cases, the index rebounded in the following year, showcasing an average increase of 12.8%. This trend underscores the resilience of the market over time.
However, it's essential to emphasize that historical performance is not an absolute predictor of future results. The article rightly includes a disclaimer similar to those found in mutual funds, reminding investors that past performance doesn't guarantee future success in the stock market.
The overarching lesson from this historical analysis is clear: while there are inevitable downturns, the stock market tends to exhibit an upward trajectory over the long term. Although the S&P 500 doesn't represent the entire market, its history often aligns with broader market trends. Investors, even in the face of significant losses, should resist the temptation to completely shy away from stocks. The rarity of steep sell-offs suggests that the market tends to recover, offering optimism for those concerned about the recent decline.
