I’ve been a financial advisor for more than three decades and it never ceases to amaze me how often pundits and soothsayers offer utterly inaccurate prognostications for capital markets. It does not amaze me, however, that the financial media, consistent promoters of “fake news”, are willing to give many of these talking heads a forum for their worthless nonsense.
Case in point: according to a January 2017 USA Today poll, the average forecaster predicted a 5% growth in the S&P 500 last year. In truth, the S&P 500 Index advanced 21.83% in 2017.
So, does a sharp upward advance in one year set the stage for a pullback in the following year? Not if we use historical data as our guide.
An evidenced-based approach to investing is not just smart, it works, and the facts are enlightening.
Since 1950, the S&P 500 has risen at least 20%, exactly 24 times excluding 2017.
Shockingly, the S&P 500 in the years that following a 20% or greater advance, the average subsequent gain was 18.1%.
If you are so inclined, the data is free and readily available at NYU Stern’s website.
When the S&P 500 has declined following a 20%+ advance, the average drop has been 6.5%.
Based purely on the data, last year’s impressive advance has little predictive value, with one exception: stocks have an inherent upward bias over the longer term.
What will impact capital markets in 2018?
Longer term, it’s always about the fundamentals, i.e., economic growth and earnings growth. Low inflation and low interest rates sweetened the pot last year but those factors may well vanish in 2018.
The momentum generated by a growing U.S. and global economy is not likely to end tomorrow. While a 2018 recession can’t be ruled out, leading indicators suggest the odds are low.
Let’s not forget, there’s a crazy guy in North Korea with a big red button on his desk. That said, geopolitical events could quickly escalate and create emotional responses in capital markets.
Last year’s lack of volatility was simply remarkable. According data from the St. Louis Federal Reserve, the biggest peak to trough drop in the S&P 500 in 2017 amounted to just 2.8%, the smallest decline since 1995.
Volatility is a permanent part of the investment landscape yet 2017 dodged the bullet. Falling stock prices, aka “volatility,” are unnerving and cannot be avoided by long-term investors.
After more than thirty years of experience, I believe the most valuable role a financial advisor can play is that of counselor, not soothsayer. Predicting where markets are headed is a fool’s game. Discipline and a long-term view are every investor’s best friends. Market declines occur regularly and communicating the inevitability of temporary losses and the need to hang on in tough times is my job.
Set your course and be prepared for the occasional storm.
Embrace a rebalancing discipline that monitors risk, gradually selling when stocks appreciate and buying when stocks decline.
Be smart, be disciplined, be grateful, and remember: we live in the greatest country in the world.