Is a bull market on its way in 2023. Here’s what history shows

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

But an old saying comes to mind: It’s always darkest before the dawn. Even a cursory look at the past shows that the stock market can turn around quickly. Is a bull market on its way in 2023. Here’s what history shows.

Bull silhouette.

Image source: Getty Images.

A declining trend after a bad year

The S&P 500 is on track to end in 2022, down nearly 20%. This has happened only six times since 1928, and in four of those cases the index achieved a return of more than 20% in the following year.

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

Data source: Macrotrends. Chart by author.

Note that the two exceptions—when the S&P actually declined in the year after the close by at least 20%—occurred during the early part of the Great Depression. A lot has changed since then, especially the large increase in retail investors.

There is also a distinct trend of decline after a bad year on a general basis after the end of the Great Depression. The S&P 500 ended in negative territory 23 times between 1940 and 2021. In 19 cases, the index rose the following year.

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

Data source: Macrotrends. Chart by author.

The average gain for the S&P in the year following a crash is 12.8%. In most cases, the index was on a multi-year streak after a down year. This was especially true during the Great Recession when the sharp market decline lasted from late 2007 to mid-2009. The stock then entered the longest bull market in history.

Recession Year Pattern

Speaking of recession, however, there is widespread concern that a recession could be on the way: A whopping 98% of CEOs recently surveyed by the Conference Board think the US economy will enter a recession in the next 12 to 18 months. This pessimism is not limited to top executives. A Bloomberg News survey conducted earlier in December found that four out of five economists expect a recession in 2023 or 2024.

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

^SPKS chart

^SPKS data according to ICharts.

The S&P 500 has fallen during most recessions. In some cases, the decline was particularly steep. However, stocks don’t always sink during a recession. For example, the S&P 500 rose during the 1980 and 1990-1991 recessions.

Bull market 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 a down year, it doesn’t always do so. And if a recession is right around the corner, it looks like the stock market is going to drop pretty high.

Similarities between our current conditions and past periods do exist. For example, the United States had high inflation in the 1970s and early 1980s. But there are also factors at play in today’s economy and stock market that are different from what we’ve seen in previous years.

The potential for a bull market in 2023 depends much more on how events unfold next year than on what has already happened. Conclusion: the future is not dictated by the past. However, the bull market will come sooner or later. The current market decline could offer a great opportunity for patient investors.

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