Regression to Trend: S&P 500 179% Above Trend in January

About the only certainty in the stock market is that, over the long haul, overperformance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis (see footnote below) to the question.

Below is a chart of the S&P Composite stretching back to 1871 based on the real (inflation-adjusted) monthly average of daily closes. We're using a semi-log scale to equalize vertical distances for the same percentage change regardless of the index price range. The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend. That regression slope, incidentally, represents an annualized growth rate of 1.97%.

At the end of January, the inflation-adjusted S&P 500 index was 179% above its long-term trend, down from a record high of 186% in December.

S&P Composite Regression to Trend

At the time, the peak in 2000 marked an unprecedented 109% overshooting of the trend — substantially above the overshoot in 1929 (78%) and in 1901 (93%). In recent years, the index got as high as 167% (2021) and 186% (2024) above the trend.

From this chart, we can see that the index has been above trend for nearly three decades, with one exception. From October 2008 to August 2009 the index dropped as low as 28% below trend. The major troughs of the past saw declines in excess of 50% below the trend. If the current S&P 500 were sitting squarely on the regression, its value would be 2,142.