More on Mean Reversion

Michael Santoli in this week's Streetwise column:

The trailing 10-year return for U.S. equities through the first half of this year has been as poor only six previous times since 1835–and the latest decade was worse than any of those others. The subsequent 10-year annualized total return from those earlier low-water marks was 13.3%, notes Bel Air Investment Advisors. Based on the returns the public is now happily accepting from bonds, most folks would probably be ecstatic with half that.

EconomPic has shown a similar chart as the one below before, which provides details of ten year annualized total return of the S&P 500 on the x-axis and the corresponding ten year forward returns on the y-axis (note that returns are only through 2000 as that is the last year that ten year forward returns are available).



As Michael mentioned, when returns were negative over a ten year period, the ten year forward returns have been very strong. Also interesting (to me) is that no ten year period in which annualized returns were less than 5% had a resulting ten year forward returns that were negative.

Source: Google Docs