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There is a lot of pessimism among investors as we head into the new year. 2022 brought the first sustained bear market in over a decade. Inflation remains at the highest level in the last 40 years. Big companies are laying off workers. Consumers are pinching their pennies.

But an old saying comes to my mind. it’s always darkest before morning. Even a cursory examination of the past shows that the stock market can turn quickly. Is a bull market on the way in 2023? This is what history shows.

Image source: Getty Images.

Back the bad year trend

It S&P 500: About 20% are on track to finish in 2022. This has happened only six times since 1928, and in four of those cases, the index delivered a return of more than 20% over the following year.

year S&P 500 down Change in the S&P 500 over the next year
1930 (28.5%) (47.1%)
1931 (47.1%) (15.2%)
1937 (38.6%) 25.2%
1974 (29.7%) 31.6%
2002 (23.4%) 26.4%
2008 (38.5%) 23.5%

Data source: Macrotrends. Chart by author.

Note that the two exceptions where the S&P actually declined for the year by at least 20% after the close occurred at the start of the Great Depression. A lot has changed since then, especially the huge growth of retail investors.

After the end of the Great Depression, there is also a clear rebound in general terms after a bad year. The S&P 500 has been in negative territory 23 times between 1940 and 2021. In 19 cases, the index increased the following year.

year S&P 500 down Change in the S&P 500 over the next year
1940 (15.3%) (17.9%)
1941 (17.9%) 12.4%
1946 (11.9%) 0.1%
1948 (0.7%) 10.3%
1953 (6.6%) 45%
1957 (14.3%) 38.1%
1960 (3%) 23.1%
1962 (11.8%) 18.9%
1966 (13.1%) 20.1%
1969 (11.4%) 0.1%
1973 (17.4%) (29.7%)
1974 (29.7%) 31.6%
1977 (11.5%) 1.1%
1981 (9.7%) 14.8%
1990 (6.6%) 26.3%
1994 (1.5%) 34.1%
2000 (10.1%) (13%)
2001 (13%) (23.4%)
2002 (23.4%) 26.4%
2008 (38.5%) 23.5%
2011 (0.1%) 13.4%
2015 (0.7%) 9.5%
2018 (6.2%) 28.9%

Data source: Macrotrends. Chart by author.

The S&P has averaged 12.8% in the year since the crash. In most cases, the index has followed a multi-year pace since the decline. This was especially true during the Great Recession, when the market plunged from late 2007 to mid-2009. Stocks subsequently entered the longest bull market in history.

The recession year pattern

Speaking of recession, however, there are widespread concerns that a recession may be on the way. A whopping 98% of CEOs recently surveyed by the Conference Board believe the US economy will enter a recession within the next 12 to 18 months. This pessimism is not limited to senior executives. A Bloomberg News poll earlier in December found that four out of five economists expect a recession in 2023 or 2024.

How has the stock market historically performed during recessions? Not good. The following chart tells the story. Periods when the US economy was in recession are shaded in gray.

^SPX chart

^SPX data courtesy of YCharts.

The S&P 500 fell during most of the downturns. In some cases, the decline has been particularly steep. However, stocks don’t always fall during recessions. For example, the S&P 500 rose during the 1980 and 1990-1991 recessions.

A bull market in 2023?

So will there be a bull market in 2023? Historical precedents are unclear. While it’s true that the S&P 500 usually rises after experiencing a down year, it doesn’t always do so. And with a recession just around the corner, the odds that the stock market will fall seem pretty high.

There are parallels between our present conditions and past periods. For example, the United States had high inflation in the 1970s and early 1980s. But there are also factors at work in today’s economy and stock market that are different from those seen in previous years.

The potential for a bull market in 2023 depends much more on how things play out next year than what has already happened. Bottom line: The future is not dictated by the past. However, a bull market will come sooner or later. The current market downturn may present a great opportunity for patient investors.


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