The Year After a Bounce Back
This time last year, we were wondering what might be in store for 2023 after an ugly 2022. We shared a historical perspective of what tended to happen after a down year, and the answer was you tend to get either a meaningful bounce back or two more down years that get progressively worse. Fortunately, 2023 was a bounce back year, though it felt a bit touch and go for many months of 2023. The Russell 2000 small cap index exemplified the touch and go feel during 2023 as it was down in 7 months and down for the year-to-date through the third quarter. However, a very strong rally in November and December led to a tidy gain of 16.8% for the year. Many future market historians will probably simply see it as a typical bounce back year, but anyone who lived through it and was paying attention could rightly disagree. The chart below, created by Deutsche Bank, highlights just how important it is for your investment portfolio to spend “time in the market,” and how dangerous and difficult it is to try to “time the market.”
We are always surveying the investment horizon through multiple lenses, and “past as prologue” is one of the lenses. 2023 fell within a range of what might have been expected for a bounce back year with past as prologue, so for this essay we review what happened the year after the bounce back, and fortunately there is reason for optimism. As for the S&P 500, we count fourteen instances of bounce backs after a down year since 1940, and the exciting finding is that the S&P 500 went up every one of those subsequent years. The returns tended to be less robust than the exciting bounce back year but still managed an average and median return of approximately 16%, with a range of 5.5% in 1948 to 31.6% in 1955. We do not have access to monthly or quarterly data for all time periods, but we sense from reading the tea leaves of historical charts that 2024 may be more volatile than normal with modest or better returns.
As we are looking forward into 2024 and digest the Fed’s hints at slow and gradual rate cuts, it’s probably a good time to mention one of the hazards that often prevents investors from potentially achieving more favorable investment returns. Any investors that have kept large allocations to cash since 2021 should be reminded that time in the market is more important and more controllable than “timing” the market, and that prudent cash levels and your asset allocation should be determined by your investment horizon and investment goals.
Source: JP Morgan Asset Management Market Insights, Guide to the Markets U.S. 1Q2024 as of December 31, 2023, p. 66
We continue to notice and monitor demographic trends, which will be the topics of essays this year. Given the roller coaster of last year, we’ll leave this essay short and sweetly optimistic.
Redmond Asset Management, LLC January 2024
The opinions contained in the preceding commentary reflect those of Redmond Asset Management, LLC (RAM). The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Redmond Asset Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
Redmond Asset Management, LLC is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was founded in 2005 and registered with the SEC on December 22, 2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional, and individual investors.