This week I want to drill down a little deeper on a chart that we highlighted around the middle of last year. It’s the number of record highs attained by the S&P 500 stock market index per year, going back to 1928.
I bring this chart up because, as you can see on the chart, the S&P 500 registered 70 record highs in 2021. That was the most in any year except 1995, which saw 77 record highs.
Setting a lot of record highs in a year generally means it was a good year for stock returns. That’s probably obvious, and the performance box on the bottom of the chart confirms this intuition: The more record highs set in a year, the greater the S&P 500’s return that year, on average.
But, perhaps the more interesting question is: Can the number of record highs set in a year tell us anything about the following year’s return?
It turns out the answer is yes—but with some nuance attached to it. According to the indicator, when the market sets a ton of record highs in a year (more than 35), the subsequent year’s return tends to be the second highest of all the other regimes. Only the year after a year with zero record highs has had a better average return, which is most likely explained by the fact that stock market returns tend to be the highest in the years coming out of a bear market.
The other cool thing about this chart is that it illustrates the cyclicality of the stock market. Years with a lot of record highs tend to cluster. This tends to happen during bull markets when the stock market goes through a series of record-breaking years in quick succession.
But then there are the years where no record highs are reached at all. These are those long gaps on the chart, and they tend to occur during bear markets. Returns tend to be very poor, on average, during these years. But, as we pointed out above, once the market has recovered to a new record high, the return in the year the new high is attained tends to be the greatest of all other regimes in this study.
So, overall I think this is a neat indicator that allows us to see the big picture of where we might be in the stock market cycle, and it gives us a sense of what to expect after a year in which the market sets a lot of new records.
Based on last year’s number of record highs, this year could be another good one, according to the historical record. But, at the same time, we’ve now had nine straight years of the market setting new records in a year, so maybe this bull run is getting a bit long in the tooth? We’ll have to see how this year plays out. It could get interesting.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.