By Steve Bruce
Naturally, investors want to understand what history may suggest about future returns following periods like this. While markets never move in straight lines and past performance is not predictive, historical context can help frame expectations.
Following those five prior instances of extraordinary three-year returns, the average subsequent three-year annualized return was approximately 1.8%, well below the market’s long-term average. It’s important to note that this data includes some overlap—particularly in the late 1990s—which introduces serial correlation and limits the precision of any conclusions.
Even so, one additional pattern is worth acknowledging.
In three of those five historical cases, the market peaked and entered a bear market within six months or less after the period of record-breaking returns ended.
Setting Realistic Expectations Going Forward
This observation is not a forecast, nor does it imply that markets must move lower from here. Markets are influenced by a wide range of economic, policy, and behavioral factors, many of which are unique to each cycle.
However, understanding where we are in a historical context is critical. Periods of exceptional returns often raise expectations that recent performance will persist indefinitely—an assumption that has rarely been rewarded over the long term.
At a minimum, today’s environment argues for more measured forward return expectations compared to the extraordinary gains investors have enjoyed over the past several years. This is where diversification, risk management, and disciplined portfolio construction become increasingly important.
The Bottom Line for Investors
The past three years have been exceptional by nearly any historical standard. Recognizing that reality is not about pessimism—it’s about perspective.
Successful investing is as much about managing expectations and risk as it is about capturing opportunity. Understanding where markets have been can help investors make more informed decisions about where they may be headed next.
Steve Bruce, CMT is the Co-Founder and Chief Investment Officer of Bruce Wood Capital, where he focuses on systematic global macro strategies and long-horizon, data-driven research.
