Stocks were volatile again last week, with worries about private credit, an implosion in cryptocurrencies and resulting forced technology selling, rising odds of the Federal Reserve (Fed) Bank not cutting rates in December, and AI valuations all cited at one time or another as a reason for the weakness.
It is important at times like this to keep the bigger picture in mind. The S&P 500 gained 38% in about six and a half months off the April lows until the October 28 peak for one of the most explosive rallies we’ve ever seen. Yes, everyone would prefer stocks go up forever, but they don’t, and that’s healthy.
The Toll We Pay to Invest
The S&P 500 had its second 5% mild correction of the year last week, which is never fun, but it’s part of investing. We like to say that volatility is the toll we pay to invest, which just means that in order to benefit from the higher returns stocks have provided historically, you have to stomach the inevitable bad times. If investors want pure safety, they can invest in a money market, but investing in riskier assets will likely produce a much higher return over time.
We’ve shared the chart below many times, but when times get scary and aggravating, it’s worth sharing again. The average year for the S&P 500 sees more than three different 5% mild corrections a year, which puts the two we’ve seen this year in perspective.
Thinking About 2026
“There once was a statistician who put his feet in a bucket of ice and his head in the oven. When asked how he felt, he answered, ‘pretty good on average.’” — Old statistics joke
Yes, 2025 isn’t over yet, but that doesn’t mean we shouldn’t start thinking about 2026. In fact, we are actively writing and thinking about our 2026 Outlook currently, and in today’s blog, I wanted to explore some concepts for next year.
The Big Picture Is Important
As market strategists, we like to think big-picture and work our way down to the details. For example, if we don’t see a recession next year, that means returns would likely be better than average.
Let’s just start with anyone random year and what to expect. Here’s what happens over any one-year return:
- In 62% of years (46 out of 75), annual returns are above 10%.
- In 17% of years, annual returns are positive but “below average,” which means almost 80% of the time returns are positive!
- In 12% of years, annual returns are negative but not worse than minus-10%.
- In 9% of years, annual returns are just terrible (worse than minus-10%).
The big takeaway to me is that more than 60% of the time, stocks are up double digits — not bad, not bad. Now, what about if you avoid a recession during the year? Remember, this is still our base case for 2026.
- In 68% of years (42 out of 62), annual returns are above 10%, up from 62% “unconditional.”
- In 18% of years, annual returns are positive but “below average.”
- So, in 86% of years, annual returns are positive, up from 79% “unconditional.”
- In 10% of years, annual returns are negative but not worse than minus-10%, down from 12% “unconditional.”
- In 5% of years, annual returns are just terrible (worse than minus-10%), down from 9% “unconditional”
So things get even better if there isn’t a recession — not a big surprise, but important to note.
Larger Gains and Losses Are Common
The average year for the S&P 500 gains about 9%, so you’d think a return between 8% and 10% would happen all the time, but in fact, it is pretty darn rare. This is why the joke about the statistician at the top is so important — there is no such thing as average when it comes to investing.
We found only four times in the past 75 years that the S&P 500 gained between 8% and 10%, so about average. This tells us that “unusual” yearly returns are actually normal.
Digging into the data above, 22 times the S&P 500 has gained more than 20% and 21 times it was lower for the year, so the odds of a 20% year are actually greater than a down year, something that always surprises most investors.
Taking this a step further, when stocks are up, they gain 19% for the year on average, but they fall nearly 14% when they are down on the year, once again showing that larger gains are quite common.
What About Midterm Years?
Get ready to hear this a lot, but historically, midterm years are indeed the weakest of the four-year presidential cycle. Think back to 2018 and 2022 — both saw vicious stock declines and negative returns for the year.
Midterm years gain less than 5% on average, by far the worst of the four-year presidential cycle, which you’ll hear a lot about as we head into 2025. But when you peel back the onion, it turns out that under a second-term president, the returns do much better, so there’s something for everyone here.
But what midterms are really known for is their intra-year volatility. As we show here, midterm years see a 17.5% peak-to-trough maximum correction on average during the year, far and away the most in the presidential cycle. Now, that’s the bad news; the good news is one year off the midterm year lows, stocks have never been lower and are up an impressive nearly 32% on average.
Here’s each midterm year broken down. What stands out is that they don’t tend to bottom until later in the year (August 18 on average, or a median of September 29). Still, look at those returns a year later. Should we see some typical midyear volatility, it could be very important to stay the course and not panic.
We won’t give away our overall views for next year (we’ll do that in early January), but these are some things we’re thinking about as we formulate how we see next year playing out.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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