2013 has been a stellar year for stocks. As of today, the S&P 500 is up more than 25%. There are about ten trading days left and barring unforeseen circumstance, the index will end the year in the 20+% range.

A few of my clients are concerned; with the market doing so well this year, what does that bode for 2014? Well, I don’t have a crystal ball, so all I can do is to look at historical data to make an imperfect reference.

To answer the question, I asked my intern Nahae Kim to do a study of the relationship of immediately subsequent year returns. Specifically, can one year return predict the next year?

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This is the chart she got. The X-axis represents current year returns and the Y-axis represents the immediate subsequent year return.

As you can observe with your naked eyes, the plots are scattered everywhere. There does not seem to be any obvious predictability based on this graph.

Next, I asked her to pick out specifically those years that yielded 20+% returns.

There are ten such years, and I asked her to look at the immediate subsequent year returns. Here is the table she got.

Here is the summary of the statistics:

1. The average subsequent year return is 6.1%, lower than the average historical S&P 500 return of 10%.

2. In 3 out of the ten years, the market saw losses. In only 1 of the 10, the market saw a subsequent year return more than 30%.

So here is my imperfect prediction based on historical data, the S&P 500 will most likely NOT repeat its stellar return this year. It will more than likely deliver a return lower than the historical norm. 

Let me know if this helps.

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