The S&P 500 Just Did Something It's Only Done 7 Times Ever

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Close to 100,000 Americans alive today are at least 100 years old. That means they’ve lived through 17 or more recessions, and they’ve seen a minimum of 18 U.S. presidents in the White House.

But there’s at least one thing they haven’t experienced as much as you might think: The S&P 500 just did something it’s only done seven times ever. 

Image source: Getty Images.

A surprisingly rare decline

The S&P 500 ended 2022 down 19.4%. With such a steep sell-off, few investors made money last year. However, a decline this big is rare historically. It’s only happened seven times since the predecessor of the index was created in 1923.

Technically, the S&P 500, as it exists today, was introduced in 1957. If we only focused on the period since then, the index has declined by 19.4% or more only four times.

Some might be surprised by just how infrequent such a major S&P 500 drop is. That’s likely because we’ve experienced three of them in this century — in 2002 after the dot-com bubble burst, in 2008 during the Great Recession, and the one last year.

But looking over a longer period, these huge falls are uncommon. The most recent S&P 500 decline of at least 19.4% in the 20th century came in 1974. Before then, we have to go all the way back to 1937.

Encouraging news for 2023

Investors could also have some encouraging news for the new year after last year’s steep drop. Based on history, a bull market could be on the way in 2023.

In four of the six times before 2022 that the S&P 500 fell by 19.4% or more, the index jumped by at least 23.5% in the subsequent year. There’s a clear “big-bounce-after-bad-year” trend.

The only two years when there wasn’t a big rebound were 1930 and 1931. The U.S. was mired in the Great Depression back then.

If we limit our horizon to World War II and afterward, the story is really positive for the S&P 500 after a major decline. We can even throw out the “major” part of that statement. Between 1940 and 1921, the S&P 500 ended the year with a decline 23 times. In all but four cases, the index rose in the following year. The average increase in the year after the S&P 500 fell was 12.8%.

An important takeaway

To be clear, there’s no guarantee that the S&P 500 will climb higher in 2023. That disclaimer you see on mutual funds that “past performance is not necessarily indicative of future results” (or something to that effect) is true about the stock market, in general.

However, there is an important takeaway from looking at the historical performance of the S&P 500 that investors should take to heart: The stock market goes up more over time than it goes down.

Sure, the S&P 500 doesn’t represent the entire stock market. The index only consists of stocks of 500 large companies traded on U.S. exchanges. There are thousands of other stocks that are smaller or trade on other exchanges.

However, the S&P 500 has a high correlation with the total stock market. Any lessons gleaned from its history are usually applicable to stocks, in general.

Some investors could be inclined to avoid stocks after experiencing big losses in 2022. That would be a mistake, based on what we’ve seen in the past. Steep sell-offs truly are rare. So you probably won’t have to live to be 100 to see the S&P 500 reach new heights.