The One Thing the Market (Almost) Never Does

Amid the seemingly endless volatility in the U.S. stock market, it may surprise you to know that we have a pretty good idea of what the returns will be from it. Now before you declare us out of our minds (there’s lots of other better evidence for that), notice that we carefully omitted any mention of a time frame in the previous sentence.

But the truth is, we have a pretty good idea of what will happen over the next 30 years or so. We have a long data history that tells us that the S&P 500 averages between 9-10% annually, a return that includes dividends.

The disconnect stems from the surprisingly high volatility of the annual returns. We put together a histogram of the last 96 years of annual returns, bunching them into percentile ranges. You might expect something that looks like a bell curve, but you would be very wrong.

As the graph shows, the S&P 500 had a return between 8-12% only six times in the past 96 years, with the highest cluster of returns being over 20%! In fact, if you made the seemingly surprising prediction every January 1st that the market would either have a negative return or would be up over 20% in the following year, you would have been right over two thirds of the time. And it seems like 2022 might be yet another correct forecast, though on the negative side.

As advisors, we constantly remind clients about the necessity to think long term. The problem is that it’s hard at any age to think in 30-year terms, especially in the middle of a year like 2022.

It’s a small irony that during the past two years and five months we have endured a global pandemic, massive supply chain problems, inflation spiking, and now, war in Ukraine. During that period, the market went up 18.4% in 2020, up 28.7% in 2021, and down 17% year-to-date in 2022. As Seinfeld character Jackie Chiles would say, “Speculation, Frustration, Exasperation!”