No One Expects a 40% Return for the S&P 500 This Year
I defy you to find a pundit optimistic about the stock market. Is anyone predicting double digit returns? Low to mid-single digits seems to be the popular view among those shouting the loudest. Short term returns have been stellar as the S&P 500 gained almost 12% in 2016. Intermediate returns have been stellar with the S&P 500 averaging 14.65% for the last 5 years.
So we’re due for a hefty pullback, right? Let’s look at the time frame that’s important to investors.
Long term returns have actually been sub-par. The S&P 500 returned short of 7% per year over the last 10 years. The historic average is 10%. If the market is due for a correction because the short and intermediate numbers are above average, does it also have room to run to the upside over the long term?
The Numbers Are Lying
The US large cap stock market experiences periods of low returns and periods of high returns, averaging out to 10% over time. This helps if we’re building a financial model or setting expectations over the long term. The problem is that just because the market is x% off from its average doesn’t mean that it will go up/down that much to fit our narrative. Some examples:
For the S&P 500 to average 10% over ten years at the end of this year, it would need to go up 40% in 2017.
For a 10% average 10 year return at the end of 2018, the market would need to go down 6% in both 2017 and 2018.
And that’s where clinging to statistics burns some investors. While it would take an incredibly good year for the market to hit its long term average this year, it would actually need to go down to be at the average at the end of 2018. How is that possible? Most of the focus is on what will happen this year or the next, but it’s just as important that 2017 is the last year that the -37% return of 2008 is included in the 10 year returns.
If we’re so smart, what do we think the market will do? We are smart enough to recognize that we don’t know what will happen. After all, discretion is the better part of valor and it seems like most people in the prediction business have been handed their hat lately. We do know that our energy is better spent controlling what we can control. We’ll leave the predicting to the financial entertainers.