2022 was one of the worst years for the stock market in the last 80 years, with commodities being the only asset class that provided investors with positive returns. Equities are in a bear market, bonds experienced the worst returns in the last 45 years. The past few years produced many surprises and shocks that no one accurately predicted.
Mean reversion is a financial theory positing that asset prices and historical returns eventually revert to their long-term mean or average level. The lows usually overextend to the downside, and the highs typically go too high. The average one-, three-, five-, and ten-year forward returns for the S&P 500 following a recession are +20.9%, +48.6%, +93.5%, and +256.4%, respectively. These are very attractive returns and show the best time to buy stocks is often when it feels the worst.
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