The S&P 500 returned -4.4% in 2018, ending a streak of positive annual returns dating back to 2009. For our client question of the month, we thought we would provide some historical context to a negative annual return and revisit our previous analysis on bear markets and recessions.
The below chart displays the S&P 500’s annual returns since 1928. From 1928 to 2018, the stock market produced a total annualized return of +9.2%. We would also like to highlight that this data set starts right before The Great Depression where the market posted a total return of -29.0% throughout the entire 1930s. An annualized return of +9.2% is excellent (we won’t predict that the next 91 years will be as strong), but as always, we remind our clients that the returns were not linear, and the market had its share of negative periods. The aforementioned time period includes ten bear markets, fourteen recessions, and dozens of corrections and pullbacks.
Since 1928, the stock market produced positive results in 66 calendar years vs. 25 years with negative returns. The market went higher in 73% of years with an average return of +20.7%, and declined in 27% of years with an average return of -14.0%. 2018’s return of -4.4% ranks 70th over 91 total periods. Although annual losses are always difficult, we will point out that 2018’s decline was more modest than the historical average negative return.
What about consecutive annual declines?
The S&P 500 has only had four periods that produced negative returns in consecutive years. Consecutive annual market declines have historically occurred in periods of severe economic distress. Note the following time periods:
We obviously cannot say for certain whether the market will produce positive returns in 2019 as no one can predict the future. However, we believe it is important to point out that another annual decline would be rare unless the United States suffers a negative economic event or market shock. See page 10 in our market outlook.
Did we enter into a bear market?
Bear markets are typically defined as a 20% decline from a previous market high. We covered bear markets and recessions in our October monthly recap, but we thought we would provide an update given the events of the fourth quarter. Several major US indices, including the Nasdaq 100 (Large Caps), S&P 400 (Mid Caps), and Russell 2000 (Small Caps) along with International indices including MSCI Europe, MSCI Japan, and MSCI Emerging Markets entered into bear market territory in 2018. The S&P 500 fell to the brink of a bear market on Christmas Eve (-19.8%) before rebounding by +6.7% to finish out the year. The S&P 500 is the most widely followed index and is probably the best gauge of the United States stock market. The S&P 500 is an index comprised of the 500 largest US stocks measured by market capitalization.
We believe that parsing whether the S&P 500 actually fell into a bear market is trivial and the more important exercise is to focus on where the market may go from here. Based on our previous analysis, we know that secular bear markets accompanied by a recession tend to last longer, have more severe drawdowns, and longer recovery periods. Going back to 1929, there have been 10 bear markets.
• Number of Bear Markets accompanied by a recession: 8
• Average peak-to-trough decline: -49%
• Average time it took the market to bottom: 29 months
• Average time it took the market to recover back to its previous peak: 68 months
Bear markets not accompanied by a recession tend to be more cyclical in nature. The two bear markets without a recession include right before the Cuban Missile Crisis of 1962 and the Market Crash of 1987.
• Number of Bear Markets without a recession: 2
• Average peak-to-trough decline: -31%
• Average time it took the market to bottom: 5 months
• Average time it took the market to recover back to its previous peak: 18 months
Historically, bear markets that were not accompanied by a recession were milder, quicker, and the recovery period was far shorter. We will not claim that we will be able to precisely predict when the next bear market or recession will start – we do not believe anyone can do this consistently. We can, however, rely on our experience and investment process to analyze data and get a sense of the current environment. While it is certainly possible that the United States falls into a recession in 2019, it still isn’t the most likely outcome based on the current economic data. For now, we expect that if the S&P 500 does indeed fall into a bear market that the duration will be more cyclical than secular.
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Other advisory services offered through Winthrop Wealth Management, a separate entity from LPL Financial. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The prices of small cap stocks and mid cap stocks are generally more volatile than large cap stocks. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Price to forward earnings is a measure of the price-to-earnings ratio (P/E) using forecasted earnings All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies. The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. 12. DISCLOSURES Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower priceto-book ratios and lower forecasted growth values. The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds. The Barclays Capital Municipal Bond Index is a broad market performance benchmark for the tax-ex- empt bond market, the bonds included in this index must have a minimum credit rating of at least Baa. The Barclays US High Yield Index covers the universe of fixed rate, non-investment grade debt. Euro- bonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 445 constituents, the index covers approximately 85% of the free float-ad- justed market capitalization across the European Developed Markets equity universe. The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 322 constituents, the index covers approximately 85% of the free float-ad- justed market capitalization in Japan. The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI China Index captures large and mid cap representation across China H shares, B shares, Red chips, P chips and foreign listing. With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization. The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market. With 78 constituents, the index covers approximately 85% of the Indian equity universe. The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/whole- sale trade and biotechnology. It does not contain securities of financial companies including investment companies.
< COMMENTARY
Client Questions | December 31, 2018
Negative Annual Return
By Andrew Murphy, CFA
Co-Chief Investment Officer
The S&P 500 returned -4.4% in 2018, ending a streak of positive annual returns dating back to 2009. For our client question of the month, we thought we would provide some historical context to a negative annual return and revisit our previous analysis on bear markets and recessions.
The below chart displays the S&P 500’s annual returns since 1928. From 1928 to 2018, the stock market produced a total annualized return of +9.2%. We would also like to highlight that this data set starts right before The Great Depression where the market posted a total return of -29.0% throughout the entire 1930s. An annualized return of +9.2% is excellent (we won’t predict that the next 91 years will be as strong), but as always, we remind our clients that the returns were not linear, and the market had its share of negative periods. The aforementioned time period includes ten bear markets, fourteen recessions, and dozens of corrections and pullbacks.
Since 1928, the stock market produced positive results in 66 calendar years vs. 25 years with negative returns. The market went higher in 73% of years with an average return of +20.7%, and declined in 27% of years with an average return of -14.0%. 2018’s return of -4.4% ranks 70th over 91 total periods. Although annual losses are always difficult, we will point out that 2018’s decline was more modest than the historical average negative return.
What about consecutive annual declines?
The S&P 500 has only had four periods that produced negative returns in consecutive years. Consecutive annual market declines have historically occurred in periods of severe economic distress. Note the following time periods:
We obviously cannot say for certain whether the market will produce positive returns in 2019 as no one can predict the future. However, we believe it is important to point out that another annual decline would be rare unless the United States suffers a negative economic event or market shock. See page 10 in our market outlook.
Did we enter into a bear market?
Bear markets are typically defined as a 20% decline from a previous market high. We covered bear markets and recessions in our October monthly recap, but we thought we would provide an update given the events of the fourth quarter. Several major US indices, including the Nasdaq 100 (Large Caps), S&P 400 (Mid Caps), and Russell 2000 (Small Caps) along with International indices including MSCI Europe, MSCI Japan, and MSCI Emerging Markets entered into bear market territory in 2018. The S&P 500 fell to the brink of a bear market on Christmas Eve (-19.8%) before rebounding by +6.7% to finish out the year. The S&P 500 is the most widely followed index and is probably the best gauge of the United States stock market. The S&P 500 is an index comprised of the 500 largest US stocks measured by market capitalization.
We believe that parsing whether the S&P 500 actually fell into a bear market is trivial and the more important exercise is to focus on where the market may go from here. Based on our previous analysis, we know that secular bear markets accompanied by a recession tend to last longer, have more severe drawdowns, and longer recovery periods. Going back to 1929, there have been 10 bear markets.
• Number of Bear Markets accompanied by a recession: 8
• Average peak-to-trough decline: -49%
• Average time it took the market to bottom: 29 months
• Average time it took the market to recover back to its previous peak: 68 months
Bear markets not accompanied by a recession tend to be more cyclical in nature. The two bear markets without a recession include right before the Cuban Missile Crisis of 1962 and the Market Crash of 1987.
• Number of Bear Markets without a recession: 2
• Average peak-to-trough decline: -31%
• Average time it took the market to bottom: 5 months
• Average time it took the market to recover back to its previous peak: 18 months
Historically, bear markets that were not accompanied by a recession were milder, quicker, and the recovery period was far shorter. We will not claim that we will be able to precisely predict when the next bear market or recession will start – we do not believe anyone can do this consistently. We can, however, rely on our experience and investment process to analyze data and get a sense of the current environment. While it is certainly possible that the United States falls into a recession in 2019, it still isn’t the most likely outcome based on the current economic data. For now, we expect that if the S&P 500 does indeed fall into a bear market that the duration will be more cyclical than secular.
Read our full Q4 2018 Market Review and Outlook
DISCLOSURES
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Other advisory services offered through Winthrop Wealth Management, a separate entity from LPL Financial. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The prices of small cap stocks and mid cap stocks are generally more volatile than large cap stocks. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Price to forward earnings is a measure of the price-to-earnings ratio (P/E) using forecasted earnings All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies. The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. 12. DISCLOSURES Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower priceto-book ratios and lower forecasted growth values. The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds. The Barclays Capital Municipal Bond Index is a broad market performance benchmark for the tax-ex- empt bond market, the bonds included in this index must have a minimum credit rating of at least Baa. The Barclays US High Yield Index covers the universe of fixed rate, non-investment grade debt. Euro- bonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 445 constituents, the index covers approximately 85% of the free float-ad- justed market capitalization across the European Developed Markets equity universe. The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 322 constituents, the index covers approximately 85% of the free float-ad- justed market capitalization in Japan. The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI China Index captures large and mid cap representation across China H shares, B shares, Red chips, P chips and foreign listing. With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization. The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market. With 78 constituents, the index covers approximately 85% of the Indian equity universe. The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/whole- sale trade and biotechnology. It does not contain securities of financial companies including investment companies.