Ask investors what kind of return they expect out of stocks in any given year, and many will respond with the market’s historical average return. For the S&P 500 Index from January 1926 through December 2023, that’s been a little over 12%. Unless you have a crystal ball, that’s a reasonable guess in any given year.
And yet, history shows us what we end up getting from stocks is likely to be far from the average. Since 1926, only 15 out of 98 years had returns within five percentage points of the 12.2% average. In the other 83 years, the average deviation was over 18 percentage points. Talk about an uncommon average!
Actual returns can deviate from expected returns because information and circumstances change. If the news is better than expected, markets may go up. Of course, the reverse is true if the news is disappointing. In a world with so many potential sources of news—the economy, elections, geopolitical conflict—it shouldn’t be surprising that we often receive returns either much higher or lower than the long-run average.
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At the end of August, the Bureau of Economic Analysis released new personal consumption expenditures index data showing that inflation has likely slowed enough for the Federal Open Market Committee (FOMC) to cut interest rates at next week’s highly anticipated meeting.
Now, many investors may be wondering whether they should adjust their bond allocations depending on the timing and pace of the expected rate cuts. Our research shows that it’s difficult to draw actionable conclusions from Fed watching. Per Exhibit 1, evidence shows that bond markets may move ahead of the Fed because markets continually process information that might factor into Fed decisions.
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It’s only been a couple months since I was encouraging patience with small cap value based on past examples of quick turnarounds in relative performance. At the risk of sounding like a rooster taking credit for the dawn, I am comfortable saying that July’s US small cap value resurgence was a welcome development.
This story has been deservedly covered in the media, and here are my favorite stats for performance of small value versus large growth based on returns for the Russell 2000 Value Index and Russell 1000 Growth Index.
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Japan’s stock market has been in the news lately for setting “a new market high.” While its stock market did exceed the 1989 high-water mark, this strains the definition of “news.” Using a market-cap-weighted index that includes dividends, that threshold was cleared back in May 2017.
Japan’s stock market history is an important talking point but for a different reason: the prospect of a market going decades without a positive cumulative return. Many investors, who expect the US stock market’s recent dominance to continue, have questioned the benefits of global diversification. They would do well to view Japan as a cautionary tale. I doubt many investors in the late 1980s would have expected the broad Japanese market to go nearly three decades without a new high. Even some of the concerns about Japan in 1989—high valuations, top-heavy performance—resemble today’s concerns about the US market.
History says it’s challenging to pick which countries will outperform. Japan’s experience suggests there’s a lot of uncertainty around individual markets. Global diversification helps mitigate that uncertainty.
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