The analysis examines the performance of the S&P 500 in relation to the extent of drawdown, which is the measure of how far the index has declined from its highest point over the preceding year.

While these figures represent averages and individual outcomes can vary significantly around these averages, they provide a broad perspective on the historical performance trends of the S&P 500 in different drawdown scenarios.

The Bigger the Drawdown the Better the Outlook S&P 500 Index Returns after various drawdowns (1950-2022)

Here are some key takeaways from the information provided:

• For significant drawdowns, there is less clarity regarding the market performance over the next 3-6 months on average, but trends become more apparent over a one-year period.
• Following a drawdown of 10% or more, the average one-year return tends to improve as the drawdown severity increases.
• After surpassing a 15% drawdown, the subsequent one-year return typically exceeds the average of 9%.
• Drawdowns classified as bear market territory (exceeding 20%) represent just under 8% of the data points, with a historical average return of 18.43% over the following year.

Below chart illustrates the predictive power of the S&P 500 historical performance before election day.

The data presented indicates a strong correlation between stock market returns and the outcomes of U.S. presidential elections.

By analyzing the performance of the stock market leading up to the elections, it is possible to calculate the probability of the incumbent party winning or losing based on whether the market returns were positive or negative during the period.

The “hit rate” of predicting election results based on the sign of the stock market return from one year to one month before the elections exceeded 50%.

This predictive accuracy was even higher when looking at the returns three months prior to the elections, with a probability of over 85% in accurately forecasting the election outcome.

Specifically, a positive three-month return suggested a victory for the incumbent party (85% of the time), while a negative return indicated a higher likelihood of the incumbent party losing the election (88% of the time).

Based on the analysis conducted, it is evident that there are correlations between stock market returns and U.S. presidential election outcomes, primarily attributed to their shared dependence on the state of the economy. As famously emphasized by presidential adviser James Carville in 1992, “It’s the economy, stupid.”

Drawing from this analysis, the conclusion is that the 2024 presidential election is not expected to deviate significantly from historical trends based on the relationship between stock market performance, economic conditions, and election outcomes.

Here is an illustration of the “cycle of investor emotion:”

The “cycle of investor emotion” demonstrates that as markets rise and investor emotions shift from optimism to euphoria, a savvy investor should become more cautious. Conversely, as markets decline and emotions turn to despondency, it presents a good investment opportunity.

However, we see the total opposite narrative taking place in equity flows as emotions tend to make investors abandon and reenter stocks at the worst times.

The following chart shows the average S&P 500 returns in each month between January 1928 and April 2024.

Some highlights from the chart above include:

• The stock market generally trends upward more frequently than it declines, with the S&P 500 historically proving to be a profitable investment in 9 out of 12 months, showcasing minimal declines during the remaining months.
• Contrary to the popular belief to “sell in May and go away,” statistics show that the S&P 500 typically experiences growth between June and August, with July being historically the strongest month for the index.
• The September Effect is a notable phenomenon where the S&P 500 often sees a sharp decline in September, followed by a quick rebound in the subsequent months, possibly due to increased optimism surrounding holiday spending. Investors can strategically utilize this pattern by maintaining cash reserves to purchase stocks during September.
• An additional crucial lesson not immediately evident from the chart is that the likelihood of a positive return in the S&P 500 tends to increase as the holding period extends, emphasizing the importance of long-term investment strategies.

In total, there were 1,156 months between January 1928 and April 2024, and the S&P 500 generated a positive return in 685 of those months. In percentage terms the index was a profitable investment monthly about 59% of the time during the past 96.3 years.

However, the probability of positive returns increases as the holding period increases.

Owning an S&P 500 index fund for a rolling 20-year period has consistently proven to be a profitable investment strategy since 1928. This track record indicates that investors who hold onto an S&P 500 index fund for at least two decades have historically seen positive returns on their investment.

In conclusion, the S&P 500 demonstrates a highly favorable risk-reward profile over extended periods, making it a compelling choice for investors seeking to build substantial wealth over time. Given its historical performance, investors may find it challenging to identify another asset class that offers similar potential for long-term growth.

Therefore, an S&P 500 index fund is a solid investment option for most investors, particularly when combined with a diversified portfolio of individual stocks.

Past performance does not guarantee future results. Investing involves risk, including loss of principle.