In 2025, there is a 73% chance that the U.S. stock market will go up. As of Dec. 16, the Vanguard Total Stock Market ETF VTI -0.49% showed that the market had already given a return that was well above average for the year, 28.2%. This makes the odds seem too good to be true.
This is three times the average calendar-year return for the U.S. market since 1794, which was 9.2% (according to a database made by Edward McQuarrie, a retired professor at Santa Clara University).
But the odds that the market will go up in a given year don’t seem to care much about what happened in the year before. If you look at all of McQuarrie’s calendar years, the market has a 73% chance of going up in any given year. After years when stocks went up, those odds are 72%, which is not statistically different.
What about times when the market went up for five years? The Vanguard Total Stock Market ETF has given a 14.9% annualised return over the last five years, so those odds would hold true in 2025. Again, the odds of the market going up in a calendar year after five years of gains are about the same: 72%.
What are the odds when coming off decade-long advances, such as the last one — over which the Vanguard ETF has produced a 13.4% annualized return. Following 10-year periods in which the market rose, the odds of the market rising in the subsequent calendar year are 73%. (These odds are plotted in the chart above.)
An example from gaming helps show what these numbers mean. Think about this question: What are the chances that a coin will land on its head after five trips where it has done so? And what if the last five flips had all been tails? A lot of us answer these two questions in different ways, as if the odds for the sixth flip are connected to the odds for the fifth flip. Of course, they don’t because the coin doesn’t remember what it was flipped over. The odds of that sixth flip coming up heads are always 50%. The gambler’s error says that people who think otherwise are wrong.
It makes sense that the stock market would work the same way. If there was a link between the odds of the market going up in a certain year and what had happened in the year before, smart traders would use that link in January of that following year. Instead, they would place their bets in November or December of the previous year. This meant that any gain or loss that would have happened in that year would be spread out over those months. The end result would be that the link would go away.
Of course, there are other things that could make you think that stocks will do well or badly in 2025. Most assessment methods that have a good track record over the long term say that the stock market is way too expensive. Value, on the other hand, only has an effect on the market over long periods of time, like ten years. Valuation signs aren’t very good at predicting the future over shorter periods of time, like calendar years.
In the end? The chances of the stock market going up in 2025 are the same whether the market is down or up this year. They are not higher or lower than they would be if stocks were currently down a lot for the year.
