About That Long-Term Upward Stock Market Bias – December 30, 2019

We know stocks don’t move up in a straight line. Sometimes, it seems as if they take the stairs up and the elevator down.

With the year about to come to a close, the table below illustrates we’ve had a very good year. Let’s also be careful analyzing returns as the major market indexes had fallen into a pit late last year. It’s what analysts call an easy year-over-year comparison. Still, 2019 has been strong.

An overriding theme in these weekly articles has been that stocks have a long-term upward bias. This week, I’ll review the annual data going back to 1960 and illustrate the point.

All data are taken from S&P 500 returns provided by the New York University School of Business. The data excludes 2019.

Why use the S&P 500 Index? It’s a broad-based measure of the stock market. It’s not as well-known as the Dow Jones Industrial Average, but it covers more ground – 500 stocks vs 30 stocks. While the indexes don’t move in lock-step with each other, they typically follow a similar pattern.

Since 1960, the average annual return for the S&P 500 Index has been 11.0%. That includes dividends reinvested.

During 13 of those years, the S&P 500 Index declined. Over the remaining 46 years, the S&P 500 gained ground. Hit a few buttons on the calculator, and we learn that the broad-based average finished in positive territory 78% of the time. If this were an NFL football team, the S&P 500 would have the equivalent of a playoff-worthy record of 12-4.

Let’s break it down further. Of the 13 times when the S&P 500 finished lower for the year, the average decline was 12.7%. The range of the annual decline: -3.06% to -36.6%. That’s right, there are times when our playoff-worthy team has gotten its clock cleaned.

During the 46 years when the S&P 500 has ended the year on a positive note, the average increase has been 17.7%. The range of the annual increase: +0.3% to +37.2%.

Investor’s corner

Over the longer term, the broad-based S&P 500 Index has had a significant upward bias.

Diversification among the major sectors isn’t that far off from purchasing a stake in the U.S. economy. We don’t know if the economy will be larger next year, but over a long period, the U.S. economy has expanded. We see it reflected in long-term stock market performance.

While the range of stock market returns has been wide, a well-diversified portfolio, including stocks and other investments, has historically been an excellent tool for creating long-term wealth, as the data highlight.

Created 2019-12-30 15:28:51