Sure, we could see another year of double-digit returns: Morning Brief

Sam Ro

·Contributor

Mon, Jan 4, 2021, 2:57 AM3 min read

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Monday, January 1, 2021

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What history tells us about streaks of big returns

The stock market closed out an already impressive year with a powerful year-end rally, with the S&P 500 (^GSPC) climbing 14.9% in November and December.

In the post-World War II era, the S&P delivered >10% gains during the final two months of the year just five other times (1954, 1962, 1970, 1985, and 1998). And as LPL Financial analysts observed, each of those five experiences were followed by a year of >10% returns in the market with an average gain of 18%.

A big 2021 would be particularly impressive considering the run the market has already been on. Last year’s 16% gain follows a massive 29% surge in 2019.

Don't be surprised if we get another year of big returns.(LPL Financial)

DataTrek Research looked back at the history and observed that the market delivered three (or more) consecutive years of >10% five other times: 1942-1945, 1949-1952, 1963-1965, 1995-1999, and 2012-2014.

While it wouldn’t be unprecedented to have another year of double-digit returns, it would be pretty unusual. And DataTrek’s Nicholas Colas has his doubts.

“If we had to guesstimate, we’d say 80% of all the baseline good news expected in 2021 is already incorporated in an S&P 500 at 3,700 in late December 2020,” Colas wrote last week.

As we discussed in the Morning Brief last Wednesday, the stock market at present reflects expectations for the future. And there are lots of bullish things that people are confident will happen in the coming months.

“Do we really think investors haven’t figured out that corporate earnings will rebound sharply in 2021?” Colas said. “Or that they don’t believe the Federal Reserve is serious about keeping interest rates low across the curve?”

If stocks are going to have another blowout year, Colas thinks we’d have to see earnings growth that is stronger than the strength already expected; a COVID-19 vaccine rollout that happens much quicker than expected; and/or more fiscal stimulus than is on its way.

The truth is we really are living in unprecedented times and history won’t be very helpful in predicting what’s to come. Indeed, there’s a strong argument to be made that all the perceived optimism about the future is actually far more conservative than most think, which means the risks could be tilted to the upside.

All of this will become much more clear in hindsight.

By Sam Ro, managing editor. Follow him at @SamRo

What to watch today

Economy

9:45 a.m. ET: Markit US Manufacturing PMI, December final (56.3 expected, 56.5 in prior print)
10:00 a.m. ET: Construction spending, month-over-month, November (1.0% expected, 1.3% in October)

Earnings