Happy New Year!
I’ve been in the investment advisory and financial planning field for over 30 years. I’ve been inundated with market prognostications and soothsayers that offer up specific roadmaps for stocks. None have been consistently right.
That said, we'll rely on simple math to guide us as we enter the first week of 2018.
The S&P 500 Index advanced 21.83% in 2017. That figure includes reinvested dividends. No question about it, 2017 offered rich rewards to those who invested in a well-diversified portfolio.
So, does a sharp upward advance in one year set the stage for a big pullback in the following year? Not if we use the historical data as our guide.
I recognize that the following examples are a little heavy on numbers, but please stick with me. I believe you’ll find this evidenced-based investment overview to be very enlightening.
Since 1950, the S&P 500 has risen at least 20% (including reinvested dividends) 24 times (excluding 2017).
In the year that followed, the S&P 500 finished higher (all examples include reinvested dividends) 19 times. Put another way, the S&P 500 rose 79.2% in the year that followed a 20% or greater advance, with an average gain of 18.1%. (Here is the long-term market data.)
Since 1950, the S&P 500 (including reinvested dividends) has finished higher 79.10% of the time, excluding 2017. The average advance when the S&P 500 finished higher (looking only at years that finished positively) was 19.1%.
When the S&P 500 has declined following a 20%+ advance, the average drop has been 6.5%.
Based purely on the example above, last year’s impressive advance has little predictive value, with one exception. It simply tells us that stocks have an inherent upward bias over the longer term.
What will impact the stock market this year?
Longer term, it’s always about the fundamentals, i.e., economic growth and profit growth. Low inflation and low-interest rates only sweetened the pot last year.
The momentum generated by a growing U.S. and global economy is likely to carry over into this new year. While a 2018 recession can’t definitively be ruled out, leading indicators suggest the odds are low. (With history as our guide, we would expect a recession to occur in the next 12 to 24 months.)
That said, unexpected events can create short-term emotional responses in the market that are best avoided by long-term investors.
Last year’s lack of volatility was simply remarkable. According to data from LPL Research and the St. Louis Federal Reserve, the biggest drop in the S&P 500 amounted to just 2.8%. It was the smallest decline since 1995.
The average intra-year pullback for the S&P 500: 13.6% (LPL Research).
It’s an excellent reminder that volatility is typically a part of the investment landscape. It can sometimes be unnerving, but it’s incorporated into the investment plan we’ve recommended for our clients.
Table 1: Key Index Returns
|MTD %||YTD %||3-year* %|
|Dow Jones Industrial Average||+1.8||+25.1||+11.1|
|S&P 500 Index||+1.0||+19.4||+8.5|
|Russell 2000 Index||-0.6||+13.1||+8.0|
|MSCI World ex-USA**||+1.7||+21.0||+4.6|
|MSCI Emerging Markets**||+3.4||+34.4||+6.6|
|Bloomberg Barclays US Aggregate Bond Index||+0.5||+3.5||+2.2|
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Nov. 30, 2017—Dec. 29, 2017
YTD returns: Dec. 30, 2016—Dec. 29, 2017
**In U.S. dollars
We hope you've found this monthly update to be helpful and educational. If you have any questions and would like to discuss your portfolio or other important financial matters, please give us a call at (330) 836-7000 or schedule an appointment here.
Many happy returns on life,
Jonathan Torrens CFP®
President and Chief Investment Officer
TCM Wealth Advisors
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