Don't bet on an average year for the stock market: Morning Brief

Myles Udland

·Head of News

Fri, Dec 20, 2019, 3:10 AM

In this article:

Friday, December 20, 2019

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History is not on your side

On Thursday, the S&P 500 closed at 3,205.37, a record high. The Dow closed at 28,376.96, also a record high.

This brings the benchmark index’s year-to-date gains to 27.7%, while the Blue Chips are up 21.5%.

The tech-heavy Nasdaq outpaces both of its “big three” peers, however, logging gains north fo 33% through Thursday’s close.

And so any way you slice it, 2019 has been a tremendous year for U.S. stock market investors.

Next year, Wall Street analysts expect that the good times will keep rolling. But with a little less force.

Emily McCormick has been chronicling all of the year-ahead market calls coming out of Wall Street shops for the last month, and the broad consensus can be summarized as restrained optimism.

Piper Jaffray has a Street-high price target of 3,600 for the S&P 500 by the end of next year, implying a 12% gain based on Wednesday’s closing price. Most of the calls tracked by Yahoo Finance show expectations clustering around something like the historical average return of high-single digits that both the S&P 500 and the Dow have delivered to investors.

The problem with this forecast: returns for the stock market infrequently fall near this historical average.

In their Chart of the Day on Wednesday, the team over at Bespoke Investment Group reminded readers that the seemingly safe, conservative forecast being offered by analysts for next year will probably be wrong. And not wrong because fo some holier-than-thou Finance Twitter declaration that “all experts are wrong,” but wrong because history is just not on their side.

Looking at returns for the Dow Jones Industrial Average since 1900, Bespoke says that, “Of the 120 years shown, only 21 (17.5%) have been positive but up less than 10%,” the firm writes, citing the chart below.

The market goes up by its historical average of mid-single digits more rarely than most investors probably think. (Source: Bespoke Investment Group)

Bespoke adds: “That means that over 80% of yearly returns for the DJIA since 1900 have not been in the 'safe-zone' range that's most preferred by strategists. Looking at it another way, there have actually been more years where the DJIA has been down over 10% (23 years) than there have been years where the S&P 500 was up by single-digit percentages.”

So, yes, stocks usually go up. It’s just that stocks usually go up more than single-digit percentage points.

And while a lot of the restrained optimism about the market is based off a sense that future returns have been “pulled forward,” the data don’t back up this view, however intuitive it may seem to some investors.

SunTrust strategist Keith Lerner told The Final Round on Wednesday that since World War II, the S&P 500 has gained more than 20% in a year 24 times; the following year, stocks finished higher 79% of the time (or 19 times) with the average gain totaling 13%. In 16 of those 19 years, the market gained double-digits.

Stocks have gone up more than 20% two dozen times since World War II. Almost 80% of the time the market finishes higher the next year. (Source: SunTrust)

By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

What to watch today

Economy

8:30 a.m. ET: 3Q GDP, third revision (+2.1% expected, +2.1% prior print)
8:30 a.m. ET: 3Q Personal consumption (+2.9% expected, +2.9% prior print)
8:30 a.m. ET: Personal income, November (+0.3% expected, +0.0% in October)
8:30 a.m. ET: Personal spending, November (+0.4% expected, +0.3% in October)
8:30 a.m. ET: PCE deflator, November year on year (+1.4% expected, +1.3% in October)
8:30 a.m. ET: Core PCE deflator, November year on year (+1.5% expected, +1.6% in October)
10 a.m. ET: University of Michigan Survey of Consumers, December final (99.2 expected)
11 a.m. ET: Kansas City Fed Manufacturing Activity Index, December (-3 expected, -3 in November)

Earnings

Pre-market