Is it a High Five or a High Dive? What Do We Know About Stock Returns in Years Ending in '5'?

Many investors believe the U.S. stock market is likely to perform well in 2025 simply because of its position in the calendar decade, but this widely held theory deserves closer scrutiny. The notion that years ending in "5" are uniquely beneficial for the stock market lacks robust evidence and plausible reasoning, casting doubt on its validity as an investment strategy.

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Historically, years ending in "5" appear to have been favorable for the market. According to a chart that has been widely circulated, in the 13 years ending in "5" since 1895, the stock market rose in 92.3% of those instances. The only exception was 2015, which saw a decline. In comparison, across all calendar years, the market typically rises about two-thirds of the time, making the 92.3% success rate of five-ending years seem noteworthy.

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However, this pattern requires further analysis before concluding it has predictive power. One way to evaluate such claims is through an out-of-sample test, which examines data beyond the original dataset to determine if the pattern holds. In this case, Edward McQuarrie, professor emeritus at the Leavey School of Business at Santa Clara University, provides a valuable dataset that extends back to the early 1790s.

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By incorporating 10 additional years ending in "5" into the analysis, McQuarrie's data reveals a less compelling picture: in these earlier years, the market rose in only five out of 10 cases. This success rate is lower than the average for all calendar years, challenging the significance of the "years ending in 5" theory.

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Further evidence weakens the case for this theory. When examining market performance across all years since 1794, five-ending years exhibit a slightly above-average gain rate. However, years ending in "8" and "9" demonstrate even higher rates of market gains. More importantly, the differences among these year-ending patterns are not statistically significant at the 95% confidence level. This means the variations could easily result from random chance rather than a genuine pattern.

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Another major shortcoming of the theory is the absence of a logical explanation for why years ending in "5" would consistently outperform. Statistical anomalies are common in large datasets, and without a credible rationale to support a pattern, its reliability is dubious. As the saying goes, "correlation does not imply causation." Without a sound basis for the pattern, its investment relevance is minimal.

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This issue of overinterpreting statistical coincidences is not new in financial analysis. One infamous example comes from David Leinweber, a researcher and former director at the Lawrence Berkeley National Laboratory. In his book, Stupid Data Miner Tricks: Overfitting the S&P 500, Leinweber highlights how seemingly unrelated data can show spurious correlations with the stock market. For instance, one of the strongest statistical correlations with the S&P 500 that Leinweber uncovered involved butter production in Bangladesh. Such examples underline how dangerous it is to rely on coincidental data patterns when making investment decisions.

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The tendency of Wall Street to promote theories like the "years ending in 5" pattern may stem from a desire to encourage investor confidence during uncertain times. The failure of the “Santa Claus rally” in late December 2024 and the stock market’s weak performance during the first five trading days of January 2025 have likely heightened the pressure to present optimistic scenarios. Wall Street brokers may be grasping at straws to justify continued investment in equities, even in the absence of solid evidence to support such claims.

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Ultimately, investors should remain skeptical of simplistic theories that attempt to predict market behavior based on arbitrary patterns. The stock market is influenced by a complex web of factors, including economic data, corporate performance, geopolitical events, and investor sentiment. Relying on superficial patterns tied to the calendar is unlikely to yield consistent or meaningful results.

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Instead, investors are better served by focusing on sound investment principles. Diversification, disciplined risk management, and a long-term perspective are far more effective than chasing speculative patterns. Moreover, understanding the underlying fundamentals of the economy and individual companies provides a stronger foundation for making informed decisions.

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While the allure of a pattern like "years ending in 5" is understandable—it offers a simple, seemingly compelling reason to expect gains—it is ultimately a distraction. Historical data and rigorous analysis debunk its significance, and its lack of logical grounding further undermines its credibility. Investors should be cautious about allowing such theories to influence their strategies, as doing so could lead to misplaced confidence and suboptimal outcomes.

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In conclusion, while years ending in "5" may have shown occasional success in the past, the evidence does not support treating this as a reliable predictor of market performance. Instead of chasing patterns with dubious merit, investors should focus on proven methods to navigate the complexities of the stock market.

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