By Brad Thomason, CPA
This article was first posted to our sister-site, NoStockPortfolio.com, toward the end of 2017. For all of our older blogs (2015 to 2017) and a world of information about Alternative Investments, please give it a look. Thanks.
Well, unless something dramatic happens, it looks like we are on track to see a rise in US stock markets of about 24% for 2017. Notably, that follows a rise last year of about 21%.
That’s what the level changes in the Dow imply. Depending on how you owned your stocks (funds, etfs, individual shares), you might have had some dividends; but you also might have had some fees or commissions. For most those more or less offset, which is why we tend to just use the level changes themselves as a rough gauge of what really happened.
So anyway, two years in a row of solid, 20%+ returns. Why it happened, whether it should have happened, and irrespective of if it happens again in the future, doesn’t change that it did in fact occur. A lot of US families have more wealth than they did two years ago. That’s reality, and any negative spin that one might want to offer, at the level of opinion, seems secondary, to me.
I will however point out a caution. Despite the fact that we’ve had two really nice years back to back, don’t let that carry too much weight in terms of what your long-term expectations are. Because despite what we’ve seen the last two years, the overall return for the last 10 years is much different. It’s averaged about 6.9%. And the decade before that, only 4.4%.
We have a tendency to forget that the stock market measures a real thing: profits and profit-prospects of US companies. For there to be radical changes of value over sustained periods of time, there have to be substantive changes in the real world which match those increases. Well, for there to be increases that don’t reverse later on, there has to be real change.
Whether or not US companies have done enough in the past two years to be worth 50% more than they were 24 months ago is something that I think most any fair-minded person would admit is open to debate. Now maybe stocks were under-valued two years ago, maybe they are over-valued today, or maybe there’s some combination of the two. We don’t really know, and to me, those are secondary considerations also. Again: The market DID move up by that much. That’s important. But the next important thing is where it goes from here.
Planning exercises incorporate long-term estimates about what the return projections are for a given asset class. With that in mind, I think the prime caution here is to remember that what has happened the last two years can’t be considered normal. Not in terms of what’s likely to happen over and over again, out into the future.
A generation ago there was a popular notion that stocks increased at a rate of 12% a year. If you look at the decade from 1988 to 1997 (2 ten-year periods ago), the actual average rate was closer to 15%. But there were several rather unique events going on during that period, including economic fallout from the collapse of the Soviet Union, and the process of technology becoming a pervasive presence in everyday life. There was also some geeky stuff going on in terms of the evolution and maturation of global financial markets, and an increased rate of participation in stocks by rank and file workers as defined benefit plans started to become a thing of the past. All of these were significant factors, affecting both the underlying companies and their avatars in the market. They were also one-time events which one should not have reasonably expected to see repeated. Nor were they.
Since then, the rate of increase has been markedly lower. Without those forces in the market which we saw in the 80s and 90s, long-term growth rates have tended more toward the kinds of rates which have been normal over the post-Depression years. It’s hard to get a bead on exactly what these are, as rapid periods of increase and decrease are scattered in at fairly regular intervals; and in fact the ten-year average that you get if you measure on a rolling basis (i.e. 2000-2009, then 2001 to 2010, then 2002 to 2011, etc) changes each time, too.
But what we can say is that the market doesn’t increase at a 20% clip every year for any long periods of time. The things that would have to be going on at the level of economic substance for them to do so is simply beyond anything which history (or mathematics…) tells us we should expect.
So while you are enjoying your recent wins, please keep that in mind. Every investment brochure you’ve ever seen stated that past results are not an indication of future performance. The moment that we are living in right now is the kind of moment that regulators had in mind when they required that language to be inserted. It’s very good advice.
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