Normal Isn't Normal

Rarely do we have a "normal" year investing in the stock market.

All opinions expressed in this article are my own, and are not financial advice. This is for entertainment purposes only.

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We Have it All Wrong

There was a very good article in the Wall Street Journal this past week titled “Investors’ Hope for 2024: A Return to Long-Lost Normalcy” which spelled out how crazy the past several years have been in the stock market and why investors look forward to “calm”. While this was a very well written article (which I encourage you to check out), there is no such thing as normal in the stock market. In fact, you could argue that normal isn’t normal.

This idea is even creeping into how investment managers are viewing expected returns this year. The below chart shows what Wall Street strategists expect from the S&P 500 in 2024. There is not much optimism on Wall Street, with Yardeni Research being the biggest bulls on Wall Street, expecting a 13% gain. Even Tom Lee and Fundstrat, who are very popular bulls, only see 9% upside in 2024.

Being a strategist is incredibly difficult, and I do not envy them. However, I want to challenge this idea that we can’t have good returns this year, while not sounding like a crazy man. Normal isn’t normal in the stock market, and if you expect it, you’ll be sorely disappointed.

How Often Do We Have “Normal” Returns?

I looked back at the average return and yearly returns of the S&P 500 since 1960. The average return has been roughly 8% per year, which is widely known. So if the average return is 8% per year, how many years has the S&P 500 returned, say, between 6%-10%?

6 years.

Roughly 9% of the time since 1960 does the S&P 500 have an “average” year. Now you see what I mean when I say that normal isn’t so normal in the stock market. A “normal” year you would expect an 8% return, but that almost never happens. Okay, so what is the most common return in the stock market?

Since 1960, stocks had a yearly return of greater than 10% 39 times. Yes, roughly 62% of the time stocks see returns greater than 10%. To go even further here, 35 of the 39 years stocks were up over 15%! This means 55% of the time stocks see a return of greater than 15% in a given year.

And the icing on the cake, stocks have been lower only 15 years out of the last 63, meaning they are only lower 24% of the time. This goes with the general rule of thumb that stocks are down 1 every 4 years. This also means the market is more likely to be down any given year than for it to have a “normal” return.

How is this Possible?

Tremendous highs and punishing lows. Many of the negative years in the stock market include draw downs of -18% in 2022, -38.52% in 2008, -30.51% in 2001, and so on. 2022 and 2023 are a great example of this. The S&P 500 fell roughly -18% in 2022, and was up over 24% in 2023. Drastic moves in either direction define the stock market, and it just so happens the average of all these wild moves gives us +8% per year over a long period of time.

The Reason To Be Bullish

The reason to be bullish is because the odds are in your favor. The most likely outcome any given year in the stock market is a return of over 10%, and probably even greater than 15% most years. Sure, you’ll be wrong on average once every four years, but that is, in my opinion, a hell of a lot better than being wrong three out of every four years.

My (Worthless) Prediction

I don’t like making predictions about where the price of something will be by the end of a year because they are usually wrong, but I decided to give it a go at the S&P 500. Most professional strategists are pretty terrible at price targets, so can I really be any worse?

As I showed above, the median price target on Wall Street is 4875 for the S&P 500, which would give us a 2% gain in 2024. I don’t buy that, given the data I shared above.

With that said, with no earnings estimate or any brilliant logic, I think the S&P 500 will finish near or above 5500 by the end of 2024. Why? Because that would give us roughly a 15% gain on the year, which is the most likely outcome any given year. I don’t know how the election will impact the market, I don’t know if earnings will improve, I know nothing to be honest, but using data I can find the most likely outcome for the market.

I think the only thing these types of predictions can be useful for is entertainment. I won’t buy or sell based on this, but it will be fun to watch as the year goes to see if I come anywhere close to my target.

With that said, just remember normal isn’t normal, and markets rarely have “average” returns. Odds are we will have a great year investing, but every so often the market will have a drastic and often painful pullback. Here’s to a “not so normal” 2024.