Previous week's weekly market wrap

Three-Peat in the Making? Can the Market Keep Winning?

Key Takeaways

• The stock market continues its impressive performance in 2024, which if maintained, would give it a second consecutive year with a return above 20%, something that has occurred in only five periods over the last 75 years.
• While only one of those periods saw that level of return again the following year, history does show that the market often continued to move higher, just not at that same pace.
• Current conditions are hardly devoid of risks, but the present setup of a growing economy, more friendly Fed policy, and an uptrend in corporate profits is, in our view, supportive for further gains ahead, just perhaps not as smooth or as strong as we've enjoyed of late.

The stock market has been on quite a run, rallying more than 12% just since early-August and extending its year-to-date return to nearly 23%.* If the S&P 500 holds on to this gain for the remainder of 2024, this will be the second consecutive year with a return of 20% or more.

While we recognize we just brought a jinx into play with that statement, the strength of this market over the last two years has not been by luck. Instead, it's been powered by the "big three" fundamentals: a growing economy, a more friendly interest-rate policy outlook, and rising corporate profits.

So while there is plenty of year left, and there's no assurance that this year-to-date gain will be upheld, let's presume for a second that we didn't jinx it, and take a look back at similar market periods to see what they might tell us about the potential for this 20% sequel to turn into a three-peat.

Back-to-back banner years are somewhat rare.

• Since 1950, there have been five previous instances in which the stock market followed a 20%-plus annual gain with another 20% year.
• Two of them came in the 1950s, and as far as the magnitude of the gains, these were the most impressive periods, with gains of 32% and 24% in 1950-51, and then 53% and 32% in 1954-55. The next came in 1975-76, then again in 1982-83, followed by the tech bubble-phase in the late-1990s.
• Outside of those periods, there were 14 years in which the market gained 20% or more, but failed to repeat that feat. Of those instances, the market rose the following year nine times and declined five. Of the years with a gain, the average was 14%. The average loss in those five instances was 8%.
• So while 20%-plus yearly gains are common (nearly 40% of years from 1950 to 2023 had a return above 20%), back-to-back rallies of that magnitude are fairly rare. Thus, the adjoining gains last year and in 2024 (so far) should not be taken for granted.

What about a three-peat? 

• As the chart above shows, there was just one instance in the last 75 years in which the market was able to extend the 20% winning streak to a third year. As a good reminder of just how prolific the bull market of the 1990s was, the run of consecutive 20%-plus gains was extended to five consecutive years. We'd note that this is also how bubbles are formed.
• Excluding that run in the 1990s, in the four previous instances in which the market logged back-to-back 20% returns, the following (third) year saw a gain in three of the four, with an average return of 6%.
• Looked at differently, if we focus less on individual calendar years and evaluate rolling three-year-period returns, we see that there are more instances in which returns averaged more than 20% per year over a three-year stretch. In addition to the 1990s, this was the case several times in the 1950s, the mid-1980s, the mid-2010s and again in the early 2020s. We'd also point out that by this measure, recent market returns are healthy (averaging 11% from 2022-24) but don't suggest that the stock market is overextended or has necessarily come too far too fast.

What's the recipe for success?

• Again, we recognize there is a bit of "counting our chickens before they hatch" in this exercise, as it remains to be seen if the stock market can hold on to book its second straight return of better than 20%. We'd also point out that there is nothing magical about the 20% mark, though we'd view it generally as a mark of a particularly strong annual performance. There have been nine years since 1950 in which the stock market gained between 15% and 20%, which are also very strong returns (the overall average annual return for the S&P 500 from 1950-2023 was just shy of 13%).*
• Instead, this evaluation recognizes that 2024's better-than-20% gain so far, on the heels of 2023's 26% increase, puts this market on track toward fairly uncommon territory. As noted above, following such a two-year performance in the past, stocks mostly saw gains continue into the third year, but at a more moderate level.
• The ultimate determinant of 2025's performance will, in our view, largely be determined by the fundamental backdrop, namely economic growth, Fed policy (interest rates), and the trend in corporate profits. Here's a look at how current fundamentals compare with the five prior periods in which stocks gained 20% for two consecutive years:

• There were unique elements to each of these past periods, highlighting the variety of conditions that seeded the strong stock-market performance. The post-war expansion in the 1950s was a powerful force for the markets. The recovery from the stagflationary downturn fueled the rally in the mid-1970s. The rally in the 1980s occurred after the end of the inflation-driven double-dip recession, while the mid- to late-1990s gains were driven by a strengthening economy and the dot-com mania. While far from infallible, we'd point out that the current setup is supportive of the case for another positive year in 2025.

  • GDP growth isn't as robust as prior instances, but we don't think a recession is imminent.
  • The Fed is easing policy now, where it was tightening in most prior instances.
  • Corporate earnings are accelerating compared with a weakening profit trend in the previous comparable periods.

  It may be a stretch for the stock market to make it a three-peat with another 20-spot next year, and we doubt the year ahead will progress without some setbacks, but fundamental conditions do, in our view, support a favorable outlook.

Craig Fehr, CFA
Investment Strategist

^{Source: *FactSet}

Weekly market stats

^{Source: FactSet, 10/18/2024. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Morningstar Direct 10/20/2024.}

The week ahead

Important economic releases this week include new home sales and PMI data.