Like a lot of people, the start of a new year finds me reflecting about the past year and thinking about the year ahead. What does this new year hold for us from an investing perspective?
In January 2019, I took a close look at the stock market’s historical data. That analysis suggested 2019 would be a strong year for the stock market, and ultimately, that’s exactly what happened, with the market having its strongest year since 2013.
Did I have a crystal ball telling me what to expect in 2019? Definitely not, but an important component of our process in helping you create a sound financial plan is to be students of the market and its history and let that analysis guide our discussions with you.
The market’s story is always unfolding. Looking at historical data once again, and adding 2019 into the mix, what should we expect for 2020? The market broke records on a number of occasions last year, and the S&P 500 and the Dow both hit all-time highs in December. But investors were also selling off during December, concerned about possible losses after the big year. And now, 2020 has started with surprising growth.
What does it all mean?
It’s true -- after such a big year, the 2020 stock market may have a hard time living up to 2019. Here are a few things we’d like you to consider at the start of this year.
Based on our continued study of the S&P 500’s historical data, one thing is clear: all of us should be prepared to lower our expectations for 2020 and perhaps even prepare for losses, but that doesn’t mean it’s time to make massive changes to your investment strategy.
I don’t want to bury you with data, but there are a few statistics that are important to understand.
At this time last year, there were a lot of anxious investors because 2018 had been a loss year for the S&P 500 (the market lost about 4%). People were concerned about an impending decline for 2019. History, however, suggested otherwise; the data indicated that 2019 would bounce back. In fact, a blog I wrote a year ago pointed out that when there is a single loss year, there is a 76% likelihood that the average gain the next year is a robust 26%.
As the saying goes, history doesn’t always repeat itself, but it absolutely does rhyme, and we saw that play out. We saw that hold true last year: after the 4% loss in 2018, the market ended 2019 up 31.49%.
The even better news is that 2019’s big gain after 2018’s loss wasn’t an anomaly. Again, history demonstrated that for us. We studied data from 1926 onward.
There have been:
What happens if we remove the time period prior to 1940? It’s important to note that during the Great Depression, the U.S. had a completely unregulated securities environment – no SEC, no guaranteed bank insurance. Banks went under and people lost money. The time period from 1940 forward is referred to as the regulated investment market which is our statistical focus.
Statistics also tell us that investors are more likely to run to the safety of cash or Treasury bills when interest rates are attractive. Right now, with interest rates very low (the risk-free rates of Treasury bills as of January 2020 are hovering at about 1.5%) and the inflation rate close to 2%, investors are certainly less inclined to move to cash.
The stock market tends to have more resiliency if interest rates are very low. In fact, right now, the earnings yield advantage (corporate earnings divided by share price) of stocks over cash (as represented by Treasury Bills) is approximately 3%. Our analysis shows that from 1940 forward, there were 14 periods where stocks were viewed as more attractive than cash greater than this spread (i.e., greater than 3%). Using this filter and then looking at the year following, there were only three loss periods: 1946, 1977, and 2018. Therefore, there were 11 profitable periods - 79% of the time. There was only a loss 21% of the time. You should also note the average gain in those 14 periods was 13%.
To recap, the market, as measured by the S&P 500, was up over 30% in 2019 which means it’s statistically and highly probable that we’ll have a profitable year again in 2020. Remember that historically, statistics show that from 1940 forward, if we could invest in the S&P 500, we have a 75% chance of making money and a 25% of losing money with average gains of just over 18.5% or an average loss of 6.5%.
Please be advised, past performance is no guarantee of future results. Yet, I would like to reiterate based on the above discussion: interest rates are low and corporate profits are strong. In addition, right now, the earnings yield advantage of stocks over cash (as represented by Treasury Bills) is approximately 3%. It will be interesting to see if the trends history has shown us continue.
It’s not uncommon for people to see the stock market reach all-time highs and feel the party is over or feel defensive and want to run to the safety of cash.
We continue to emphasize:
Our philosophy is to never try to time the market. To do so would be to act on emotion which leads to bad decisions. Rather, we focus on working with you to create a carefully designed portfolio where you accept short-term fluctuations for long-term results; it’s the only tried and tested successful approach.
We are always here to answer any questions you might have about your individual investment plan. Contact us if you would like to discuss your portfolio and what is most prudent for you.
Sources: Morningstar, and JP Morgan Market Insights through 12/31/2019. Earnings per share is inflation adjusted, constant November 2019 dollars. The S&P 500 is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on U.S. market exchanges. It is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalization. U.S. T-Bills, 91 Day Treasury represents the monthly return equivalents of yield averages which are not marked to market, this index is an average of the last three three-month Treasury bill issues. Please note that indexes are for comparison purposes only. An index is not an investment, does not incur fees or expenses and is not professionally managed. It is not possible to invest directly in an index. Diversification does not assure a profit or protect against loss in declining markets.
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Opinions expressed are those of Mark Smith and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
We have exciting news that M.J. Smith & Associates is now part of the Mercer Advisors wealth management firm. Read more in this post.Read More
As of this writing, the markets hit a low point for 2020 on March 23. While we hope the lowest point is behind us, we know and understand that the current market shifts can be nerve wracking for investors. This post outlines some important points to consider if you’re concerned.Read More
The Vault and the Aggregation Tool are great features within the Client Access platform that can save time and energy down the road. Learn their advantages in this post.Read More
We have exciting news that M.J. Smith & Associates is now part of the Mercer Advisors wealth management firm. Read more in this post.Read more
As of this writing, the markets hit a low point for 2020 on March 23. While we hope the lowest point is behind us, we know and understand that the current market shifts can be nerve wracking for investors. This post outlines some important points to consider if you’re concerned.Read more