Happy New Year and a peek at 2018
I’ve been in the financial planning field for many years. I’ve been inundated with articles and soothsayers that offer up specific roadmaps for stocks. None have been consistently right.
That said, let’s use simple math to guide us as we enter 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 stock portfolio.
So, does a sharp upward advance in one year set the stage for a 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 the evidenced-based approach to be quite 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 link to the raw 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. I should also add that upward bias is a key component embedded in your financial plan.
What will impact shares 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 the new year. While a 2018 recession can’t definitively be ruled out, leading indicators suggest the odds are low.
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 (and almost unprecedented). 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 you.
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 TR
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
I hope you’ve found this review to be educational and helpful.
Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.
As 2018 gets underway, I want to wish you and your loved ones a happy and prosperous new year!