We are in some what rarefied air. The trailing 12 months return of the market is now over 30%. It’s not unheard of but is on the upper end of the range.

I took a look at what happens in the year following a month-end trailing 12 months performance of over 30%. I used rolling monthly data beginning 1/1/1950 and ended in 2014. I ended there as that was a downloaded spreadsheet I happened to already have. Three items stood out in the results.

First, the following year has less volatility when the trailing 12 months return is below 30%. The range of returns was much less following a 30% plus return.

Second, the median return for the next 12 months turned out to be the same. The return for over 30% trailing 1 year produced a median return of 10.0%. The return for under 30% resulted in a median return of 9.9%.

The average return did show a difference. The over 30% trailing return was 10.1% while the under 30% trailing 12 months was 8.7%

The last item also surprised me. There were 71 months with an over 30% return. Of those, 55 of them produced a positive return giving us a 77% probability of a profit.

So the conclusion I came to is to not fear markets like we have now. Even though we have had a great trailing year return, doesn’t mean we are in for trouble. Over the next year, we should expect normal returns with less volatility. Sounds good to me.