Four Historical Patterns in the Markets for Investors to Know (2024)

After a few great years of positive returns, it can be easy to forget the reality that markets don’t always go up. To put it simply, the market can go up, down or stay flat for an extended period. Past performance cannot predict future performance. But it can help set reasonable expectations.

Here is a brief review of five historical patterns that investors should know in order to maintain proper expectations. I will present the evidence and let you make the conclusions.

Annual dips

Since the ’80s, historically speaking, at some point in every year, the S&P 500 has a drop, from peak to trough. Sometimes it’s been drops of only a few percentage points, while other years it’s gone down as much as 49%. That means that you may not need to panic if the market takes a little dip from time to time.

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Market corrections

Since the 1950s, the S&P 500 has experienced around 38 market corrections. A market correction is considered to be a decline of 10% or more from the recent closing high. That means that historically speaking, the S&P 500 has experienced a correction every 1.84 years. It would not be out of line to have the expectation that the market could correct every two years or so.

Market crashes

Since 1900, the market has had a pattern of crashing every seven to eight years, according to Morningstar and Investopedia. It is not an exact pattern (e.g., no significant crash in 2015), but there seems to be enough data to at least mention it. Here are some of the larger market crashes we’ve experienced over the years. The dates reflect when the crash started (the peak).

1903 - Rich Man’s Panic (-22%)
1906 - General panic (-34%)
1911 - WWI and influenza (-51%)
1929 - Great Depression (-79%)
1937 - WWII (-50%)
1946 - Postwar bear market (-37%)
1961 - Cold War/Cuban Missile Crisis (-23%)
1966 - Recession (-22%)
1968 - Inflation bear market (-36%)
1972 - Inflation, Vietnam War and Watergate (-52%)
1980 - Stagflation (-27%)
1987 - Black Monday (-30%)
1990 - Iraq invaded Kuwait (-20%)
2000 - Dot-com crash (-49%)
2007 - Housing crisis (-56%)
2020 - COVID-19 pandemic (-34%)

Flat markets

Since the year 1900, there’s been an interesting pattern of a grand scale. For years, I was told that markets trend. After reviewing the historical data, I think it’s more like markets cycle. Every 20 years or so, the markets have gone flat for an extended period.

Again, it’s not an exact pattern, but it is worth mentioning. The following are periods where the market remained flat from the starting point to the ending point — the overall return would be about 0% had you not reinvested dividends. In other words, had you invested in the market, you would not have made money during these periods:

1906-1924 (19-year flat market cycle)
1929-1952 (24-year flat market cycle)
1966-1978 (13-year flat market cycle)
2000-2012 (12-year flat market cycle)

Some strategies to consider

There’s no such thing as a perfect investment. There’s no such thing as a perfect investment strategy. Markets can go up, down or stay flat for extended periods. Having the right expectations associated with appropriate timelines is crucial when making decisions whether it makes sense to invest or not.

Sometimes, investing in the market is not the right choice, and that’s OK. Sometimes, it may make more sense to focus on paying off debt. Other times, it may make more sense to pick an investment or product that has less growth potential and less downside risk. Don’t let greed or FOMO (fear of missing out) on potential growth lead you down the wrong path.

If you are nervous about a potential market dip, crash or flat market cycle, consider the following strategies.

First, consider investments and products that offer principal protection — CDs, fixed- and fixed-indexed annuities and cash value life insurance.

Annuities do not have to be income streams. They can also act as a bond alternative and be positioned within your portfolio to offer growth potential and principal protection.

Cash value life insurance can offer similar benefits to annuities that are focused on growth potential, assuming that you also want a death benefit, you are reasonably healthy, and you qualify for a policy with low fees.

Any investment or product that offers principal protection may be able to help you make money during the positive years, including the positive years within a flat marketing cycle while helping protect you from loss in the negative years.

Second, consider the principle of diversification, which suggests that you diversify your assets by objectives instead of lumping everything together in investment ambiguity. You may be able to divide your assets with different time-based goals.

Third, consider working with an adviser who offers something other than a buy-and-hold strategy. If you go down this route, you will probably be taking on more risk, which may not be right for you. According to the SPIVA (S&P Indices Versus Active) Scorecard, only 21% of money managers beat the S&P 500 in any given year. In other words, proceed with caution if you decide to hire a money manager who actively trades on accounts.

Whatever path you decide, remember: There is no such thing as a perfect investment or a perfect investment strategy. Make sure you do a fair amount of research before making any financial decisions.