This brief post addresses the question of what is the most likely outcome for the market in 2020.
Today I have a brief note about what we can reasonably expect from the stock market in 2020. I have two tables to share. The first is simply a recap of the historical record, and the second is based on the probabilities of various outcomes using Bayesian Inference.
I wanted to know what has happened in the stock market in the year following a big up-move like we’ve had in 2019. NYU provides a convenient way to answer this question.
Table 1 shows each of the years where the total return for the S&P 500 was 30% or greater. Including 2019, there have been 19 such years since 1928.
The table shows the big up year, the total return of the big up year, and the total return for the following year. I did some simple calculations at the bottom of the table.
Table 1. Big Up Years
In the table above, the sample size is small, and the variance between the following-year outcomes is a mile wide, but it does offer an average return of 8.9% based on the available historical record.
Table 2. Probabilities of various outcomes in 2020
Table 2 is from my monthly letter to subscribers, and it’s very different from table 1. I make heavy use of Bayesian Inference in my work, which enables me to assign probabilities to various market outcomes.
I then assign weights to each possible outcome and arrive at a single number for the ending level of the market 12 months from today. This is an educated guess, and nothing more, but it’s based on sound mathematical reasoning.
According to this model, the most likely outcome for the S&P 500 in 2020 is a decline of 11.9%. This does not mean that I’m telling clients to sell everything and head for the bunker, because the market may end up higher – maybe much higher – than it is today. But it does influence the asset allocation decisions I make, both for my own account and for clients.