Barron's ran an interesting article in their January 12 edition in which it argued Why the Stock Market Will Keep Climbing (subscription required). That position is nothing unusual — we see bullish (and bearish) arguments written up every day of the week in this business. However, the basis of their argument was unusual, in that they were arguing the point based on a historical analysis of reversion to the mean.

First, let's define what "reversion to the mean" is: a theory that says prices and returns eventually move back (or revert) to the mean (or average). Applying that to stock market returns, in layman's terms it's simply the idea that periods of particularly good returns tend to be followed by particularly bad returns, and vice versa.

This is an extremely powerful force in investing — so powerful that noted columnist Jason Zweig of the Wall Street Journal called it "the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance."

The reason why it surprised me to see this being used as the basis of a bullish argument right now is that we're currently six years into a bull market. Normally, when stock returns have been so strong for so long, that's when bearish investors typically pull out the mean reversion theme as a reason to expect poor stock market returns in the future. And, in fairness, there's a little bit of that in this Barron's article too. But their takeaway, particularly for longer term investors, is undeniably positive.

I wish I could publish their table here, but I won't because it's behind their paywall. At any rate, I'll describe the key parts so you can follow their argument.

Using data from WisdomTree Investments (with which Jeremy Seigel of Stocks for the Long Run fame is associated), the article examines annual rolling periods from 1871-2014 at different intervals: 5-year returns, 10-year, 15-year, 20-year, and 30-year. For each of these intervals, they broke the stock market's total returns down to show the median return (the very middle data point of all the many rolling periods), as well as the performance level of the 25th and 75th percentiles.

As an example, then, there were 139 rolling 5-year periods (1871-1876, 1872-1877, etc.) in their study. The median  return of all these 5-year periods was 9.5% annualized. The 25th percentile was 14.9%, meaning that just 25% of all the rolling periods had better performance than that. Likewise, the 75th percentile was 3.3%, meaning just 25% of all the rolling periods had performance worse than that.

Those 5-year numbers are a great place to jump into this subject of what mean reversion has to say about future stock returns, because the stock market's return over the last 5 years has been so strong. Indeed, its 15.8% annualized return puts it just above that 25th percentile marker (i.e., in the top quartile of all the 5-year rolling periods).

That's not great news: remember, mean reversion says that periods of above-average returns are normally followed by below-average returns. This is the argument typically heard late in bull markets to explain why returns will be poor in the future, and it's a sound one. As valuations go up, future returns tend to go down.

However, the article notes that things may not be as bad as that data point suggests. The researcher looked separately at each of the 35 top quartile 5-year periods, and found that the median stock market return was 9% over the following five years. That's only slightly below the 9.5% median for all of the 5-year periods.

That alone doesn't present a particularly bullish vision of the future. It's not bad—better than expected even. But below average is still below average.

What makes the picture brighten significantly is expanding the view to the 10-year and 15-year intervals. The market's most recent 10-year return (8.5%) is slightly below the median for all the 10-year rolling periods (8.6%), suggesting the market doesn't have any mean reversion "dues to pay" over the next decade. And returns from the most recent 15 years (5.2%) are in the bottom quartile (6.1%) of all 15-year periods, suggesting that mean reversion might expect the next 15 years to be above average. Furthering this point, they noted that following past bottom-quartile 15-year periods, the median future 15-year return was a healthy 10% annualized.

You can only glean so much from this type of analysis, and in the interest of full disclosure, the most recent 20-year and 30-year returns have been above average (the 30-year figure actually lands in the top quartile). So this whole mean reversion issue is a mixed bag in terms of what it means for the future. But I'd suggest that a mixed bag is actually pretty good news. Again, with our starting point being six years into a strong bull market, I suspect most people are likely carrying the perception that the stock market's recent returns have destined it to a sub-par future. This research seems to refute that.

The article made one final compelling argument on behalf of long-term stock investing, detailing exactly how many times each of these various rolling periods actually lost money. In other words, of the 139 rolling 5-year periods, how many times would a stock investor have actually lost money? Here are the results of that analysis, showing the number of negative instances out of the total number of periods at each interval:

5-year 16 / 139
10-year 4 / 134
15-year 0 / 129
20-year 0 / 124

0 / 114

That's great news for the long-term investor! Zero negative periods of 15-years or longer. The gloom and doomers had their moment in the spotlight early in this bull market when they were able to point out that the prior 10-year period had been one of those rare instances when returns had been negative. But aside from a brief period following the Great Depression and another brief period following the Financial Crisis, negative 10-year returns haven't existed for stock investors.

All of that is to say, if you plan to be investing in stocks for 10 years or more, the odds are dramatically in your favor — even after factoring in that there will likely be a bear market somewhere down the line when this bull market ends. Rocky patches are part of the stock investing journey, but history has smiled on investors who had the courage to commit to stocks and stick with them for extended periods of time.