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On this day last year — Wednesday, Dec. 14, 2022 — the Federal Reserve hiked interest rates another 50 basis points, indicating its “restrictive policy” would continue for some time. Stocks went into a tailspin, as investors grew convinced that the Fed was going to tip the economy into a recession. The S & P ended last December down almost 6% and ended all of 2022 down almost 20% (19.4% to be exact). But one year later, the recession has not materialized, and the S & P 500 has recovered almost all its losses: In fact, it’s only 3% below its all-time high. 2 022 was an odd duck Last year was an unusual one — unusual because market declines of 20% don’t happen very often. There have been only 15 annual declines of 20% or more since 1926. Big market declines: uncommon (S & P since 1926) Down 20% to 30%: 8 Down 30% to 50%: 5 Down 50 to 84%: 2 Source: Dimensional Funds A 20% gain for the S & P this year isn’t unusual Fast forward to 2023: December is only half over, but it’s already a strong month, up 1.7%, above the average December gain of 1.4%, according to the Stock Trader’s Almanac. And the S & P 500? After slumping almost 20% last year, it’s up more than 20% in 2023 — more if you include a 1.6% dividend. Believe it or not, this kind of bounce back is not unusual. After big market drops (20% or more), two-thirds of the time you were made whole within one year of the bottom. We are not far off that mark. The S & P dropped 25% from the January 2022 closing high of 4,793 to the bottom of 3,577 in October 2022. We are 150 points (3%) away from the old historic high — pretty close to being made whole. One final point: You might think it is remarkable for the S & P to be up 20% in a year, but it’s not. It happens more than one-third of the time. S & P 500 (percentage advance each year) 20%+ advance: 36% of the time 10%–20% advance: 21% 0%–10% advance: 15% 0%–10% decline: 15% 10%+ decline: 12% Source: Dimensional Funds Look carefully at these numbers: the S & P 500 goes up 10% or more each year 57% of the time. It drops 10% or more only 12% of the time. This is the magic of staying long on the markets. Three-quarters of the time, the S & P 500 goes up from one year to the next. The lesson: If you are diversified and stay with the markets long enough, you are a winner.
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