Don’t fall into the trap of believing the U.S. stock market’s spectacular return over the past two years represents the new normal. Not only will the market’s return in coming months likely be a lot lower than it was over the past two years, the odds are good that its return will be well-below average. Barely positive, in fact.
Let there be no doubt that U.S. stocks’ performance over the last two years has been nothing short of spectacular. The S&P 500 SPX, +0.81% more than doubled over the two years from its March 2020 low, its best rolling two-year return since 1937. Note that the tendency plotted in this chart goes beyond mere regression to the mean. That would be the case if the stock market’s average return after a red-hot period was no different than after a terrible one.
Recency bias If you’re like most investors, your reaction to market strength over the past two years has been to become more bullish, not less. This is an example of what behavioral economists call “extrapolation bias” or “recency bias” — the tendency to assume that recent trends will persist.
MktwHulbert Lol…can’t have 20 percent return every year, jeez
MktwHulbert Two years is a blip.