Markets have a way of pulling investors in at the worst times and scaring them away when the best opportunities appear. When things look good, people expect them to stay that way. When things look bad, they assume they’ll never improve.
But history tells a different story. Just like seasons change, markets move in cycles. Strong returns often lead to weaker ones, and rough periods tend to set the stage for future gains. That’s the idea behind mean reversion—markets don’t climb forever, and they don’t stay down forever either.
The chart above shows this by tracking the Dow’s annualized 16-year returns since 1916. The blue line represents how much the Dow gained over any 16-year period, not including dividends. The middle-dashed line marks the long-term average of 5.6%. If stocks delivered steady returns, the blue line would hover around that number. But instead, it swings wildly—sometimes way below the average, sometimes far above it—before eventually settling back toward the middle.
At certain points, the Dow’s 16-year return dropped to extremely low or even negative levels. The 1930s, 1940s, and early 1980s were tough times for investors. But these periods turned out to be great buying opportunities, as future returns ended up much stronger.
On the flip side, there were long stretches when the market soared, like in the late 1990s and early 2000s. These overheated conditions often led to weaker returns later, as the market eventually cooled off.
That brings us to today. The Dow’s annualized 16-year return now sits above 12%. That’s not just high—it’s one of the highest readings on record. Only one or two periods in history have been higher, and both were followed by long stretches of weaker returns.
This doesn’t mean a crash is coming tomorrow. But it does mean expecting another 16 years of double-digit annual gains isn’t realistic. When stocks have climbed this much for this long, history suggests the next phase will likely be slower, not faster.
Many investors assume strong returns will continue forever. But history says otherwise. The best buying opportunities tend to appear when past returns are weak, and the worst long-term entry points often come after years of unusually strong gains.
Right now, the data suggests we’re closer to the latter. The market could keep rising, but expectations should stay realistic. If history is any guide, this is the kind of environment where patience and discipline matter more than ever.
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.