For investors, they say, hope springs eternal and never more so than with the promise of a new year and new beginnings. As 2019 began, though, investors were worried mightily. While stock market returns for the year, as measured by the S&P 500, were only down 4 percent, the fall and winter was dreadful and investors were afraid.
Those fear are now long forgotten after a powerful and steady rally that lifted the market by 31.49 percent, the 18th best year on record in the last century.
But given that 2019 was such a great year, shouldn’t we just be grateful, pack our cards away and sit out 2020. This seems especially prudent given the rising tensions with Iran.
Based on the historical record, these fears are just as unwarranted as the ones a year ago. Nothing in the stock market record guarantees a good year (or for that matter, guarantees anything) but the historical record suggests that on average, investors would be well served by continuing their commitments to the stock market.
We have good stock market records since 1926. Of the 94 years that encompasses, we’ve had 18 years as good or better than last year. Of the 17 times before last year, the average return has been a gain of 11.67 percent. That’s close to the average gain of 12.09 percent for all 94 years.
It’s true that 6 of those 17 years have had negative returns but only one of those years, 1937, in the midst of the Great Depression, had a return worse than a 10 percent loss. In 1937 the S&P 500 declined by 1937 after some failed policy moves including premature austerity. In three of the years, losses were under 5 percent. In the remaining two years, the losses were a little over 8 percent.
What’s more, in fully 7 of the years gains were over 20 percent and in three of the follow up years, the gains were over 30 percent. In short, the good times kept rolling.
Investors are always inclined to be fearful and to be cute about moving money in and out of the stock market. But based on the modern historical record, they’ve do well to emulate Rip Van Winkle, take a snooze instead of action, and they are more likely than not to be pleased with the result.
