Editor’s Note: In today’s article, Alex talks in depth about the unpredictability of the stock market. The truth is, no one knows when this bull market will end, but that shouldn’t stop you from investing.
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– Christina Grieves, Senior Managing Editor
In my last column, I noted that analysts argue about whether the current bull market is old and decrepit or still in its infancy.
We saw a big bottom a decade ago on March 9, 2009.
But the Nasdaq, the Russell 2000 and the Wilshire 5000 were all down more than 20% – the definition of a bull market’s end – in December.
(The S&P 500 declined 19.8% from its high. But why quibble?)
Regardless of whether this bull is ancient or young, many investors look at the exceptional returns of the past 10 years and insist they can’t continue much longer.
They could be right.
Or they could be making a huge mistake, especially if they use this conviction to exit stocks altogether.
Let me explain…
Since its inception in 1927, the S&P 500 has delivered an annualized total return of 9.8%.
Yet the 10-year return of the S&P 500 through the end of April was 14.7%, a truly spectacular performance.
History shows that long periods of outperformance are almost invariably followed by years of underperformance.
Does that mean the market is ready to tank – or at least deliver anemic returns for the next 10 years?
Not necessarily. Let’s consider a different perspective.
The red-hot decade that just ended was preceded by one of the worst 10-year periods ever.
Between January 2000 and December 2009, the S&P 500 – including dividends – delivered a negative total return.
It was a rare down decade for U.S. stocks, one that started in the midst of the dot-com bubble and ended during the collapse of the housing bubble and ensuing financial crisis.
As a result, the annualized return for the S&P 500 for the 20 years through April was only 6%. That makes it one of the worst 20-year periods since 1928.
Reversion to the mean is possible in this direction too, of course. Years (or decades) of underperformance are generally followed by years (or decades) of outperformance.
Take note: The S&P 500 would have to deliver a 17.8% average annual return over the next decade just to match its average 30-year return of 9.8%.
Is that really possible? After all, virtually no one is forecasting it.
That’s actually a point in favor.
After all, no one forecast the meteoric rise in home prices a decade ago or the breadth and depth of their fall.
No one forecast that interest rates would be cut to zero – or turn negative in other parts of the world – and then stay there for years.
No one forecast the V-shaped collapse and recovery of stocks in last year’s fourth quarter and this year’s first quarter.
So I wouldn’t let the fact that no one expects the current bull market to last another decade and even accelerate stop you from considering the possibility.
According to the U.S. National Bureau of Economic Research, the last U.S. recession ended in the second quarter of 2009.
But the recovery – often cited as the weakest since World War II – sputtered and smoked without ever really catching fire.
But now GDP growth is up, employment is up, wages are up, business and consumer confidence are up, and median household income and net worth are up.
It’s quite possible that the U.S. economy is only just now shifting into third gear.
That would mean the market has considerably further to run, especially if economic growth picks up in Europe, if a trade deal is reached with China, if inflation doesn’t rear its ugly head and if the Federal Reserve can keep its nervous foot off the brake.
That’s a lot of “ifs,” I know.
And a reminder that you’ll only find certainties in the stock market when you look back… not forward.