Stocktake: Investors should not be spooked by 2019’s big gains

A year of big gains feels out of the ordinary but is actually quite common

Over the past five quarters, notes CNBC’s Michael Santoli, stocks generated annualised gains of 8.9 per cent. Photograph: iStock

Over the past five quarters, notes CNBC’s Michael Santoli, stocks generated annualised gains of 8.9 per cent. Photograph: iStock

 

Global stocks have just enjoyed their best year since the financial crisis in 2009, with the rally led by the US market; including dividends, the S&P 500 gained over 30 per cent. Do big gains suggest stocks are at an elevated risk of falling back in 2020?

Bulls might say the calendar is misleading. Stocks fell almost 20 per cent in the closing months of 2018. Over the past five quarters, notes CNBC’s Michael Santoli, stocks generated annualised gains of 8.9 per cent – decent, but hardly irrational exuberance.

That aside, history indicates investors should not be spooked. LPL Research’s Ryan Detrick found 12 years since 1950 where stocks gained at least 30 per cent; they advanced the following year 10 times, averaging returns of 15.2 per cent.

A very big year has historically occurred in roughly one out of every five years, says Ritholtz Wealth Management’s Ben Carlson; it “feels” out of the ordinary but it’s very common. Large declines following strong years are rare, he adds.

Instead of being worried, should investors be excited? No – Bespoke Investment’s analysis of the data shows there’s no real evidence a strong year “either borrows from future returns or leads to stronger than average returns in the year ahead”. There is, says Bespoke, “little evidence that the S&P 500’s performance one year impacts its performance the next in either a positive or negative way”.

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