What will the worst relapse look like? If we go back to 1928, the average decline from peak to trough in a given calendar year is -16%.
That’s higher than it seems, right?
Credit declines were worse than average in 2025 (-18.9%), 2022 (-25.4%) and 2020 (-33.9%). Peak-to-trough declines were better than average in 2024 (-8.5%), 2023 (-10.3%) and 2021 (-5.2%).
Will 2026 look better or worse than that historical downturn profile?
I suspect most investors are assuming that at some point in 2026 there will be losses of more than 16% due to all the AI stuff.
We’ll see.
What average will the return be? Returns in any given year are rare close to the long-term average.
A typical year is not an 8-10% return, but rather a wide range of big wins or big losses:
In the average up year, stocks typically rise by about 20%.
In fact, the S&P 500 has seen gains of 20% or more in about four out of ten years.
In the average down year, stocks typically fall by double digits.
The 2020s are a perfect example of this wide range of returns. Here they are in order: +18%, +29%, -18%, +26%, +25% and +17% (so far).
What is more likely: the long-term average (+10%) or the short-term average (+21% or -13%)?
And which short-term average: up or down?
Will the stock market close out the year? Since 2020, the S&P 500 has risen five out of six years.1
Since 2009, it has risen 15 of the past 17 years.
Since 2000, the profit-to-loss ratio has been 20 to 6.
That’s fairly close to the long-term average of the past 100 years, which equates to a gain of about 3 out of every 4 years.
Usually the stock market goes up. Yes!
Sometimes it goes down. Boo!
I suspect these results depend on your investment attitude and human capital.
It is important to recognize that historical relationships are not set in stone. There is no guarantee that past performance profiles will persist in the future. That’s what gives the stock market a risk premium.
Nobody knows!
I believe this uncertainty is one of the reasons the stock market has a risk premium in the first place.
The stock market could post huge gains again in 2026, but also huge losses.
It is also possible that the market will experience a major pullback towards the end of the year on its way to big gains.
That’s normal too!
My financial ethos is based on the idea that you must create an investment plan that can withstand the good times and the bad times, the good years and the bad years, the upward and downward trends.
I don’t know what will happen in 2026.
My best guess is that there will be some volatility whether the market goes up or down.
Michael and I talked about stock market odds, possibilities, Disney and more in this week’s Animal Spirits video:
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Further reading:
My year-end stock market prediction
Here’s what I’ve been reading lately:
Books:
1Assuming something drastic doesn’t happen in December. Always a possibility!
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