High five or high dive? What we know about stock returns in years ending in “5”.

By Mark Hulbert

History suggests ‘5’ is the market’s lucky number – don’t bet on it

There is a widely held theory that the US stock market has a high probability of rising in 2025 – for no other reason than its fall over the course of the decade.

The truth is, years ending in “5” are no better for the stock market than any other year.

My hunch is that Wall Street brokers are looking to find a rationale that could justify their clients investing more in stocks. This took on new urgency after the failed “Santa rally” and then again when the stock market struggled during the first five trading days of January – a period that, according to the “Santa Claus” indicator, first five days of January,” predicts that the market will be full. -direction of the year.

That said, there appears to be strong support for the idea that years ending in the number 5 are good for the stock market. In the 13 years since 1895, according to a chart several readers sent me, the stock market has risen 92.3% of the time. The only one to see a decline was the year that most recently ended, 2015. Given that in all calendar years the stock market rises about two-thirds of the time, this rate of gain of 92 .3% certainly seems significant.

To know whether you should risk your money on pursuing this model, you need to subject it to what is called an out-of-sample test. And such a test is readily available, thanks to a database compiled by Edward McQuarrie, professor emeritus at the Leavey School of Business at Santa Clara University in California.

McQuarrie’s database dates back to the early 1790s, meaning it contains 10 years ending with 5 more than the sample that begins in 1895. Of those 10 years, the stock market rose for five of them. This is worse than the average gain over all calendar years.

The chart above shows each year’s winning rate over the entire period since 1794. Note that while years ending in 5 have a higher than average winning rate, two other years – those ending in ‘8’ ” or “9” – have even higher success rates. . Regardless, none of the differences shown in the chart are significant at the 95% confidence level that statisticians often use to assess whether a trend is genuine.

Another sign that the “years ending in 5” theory is not worth following in your investments is that there is no plausible explanation for why it should work. This is a telling shortcoming, because if you torture a database long enough, you can always find apparent statistical regularities that have no meaning in the real world.

My favorite example, and there are many, is that of David Leinweber, former director of the Center for Innovative Financial Technology at Lawrence Berkeley National Laboratory. In his book “Stupid Data Miner Tricks: Overfitting the S&P 500,” he reports that one of the indicators with the highest statistical correlation with the S&P 500 SPX is butter production in Bangladesh.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at [email protected]

Read more: Can January really predict the future of the stock market? Let’s count the paths.

Also read: S&P 500 begins January with gains after Santa rally collapses. What to watch for next.

-Marc Hulbert

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