How The Calendar Messes With Stock Market Returns

People in the financial/investment industry like to throw around past performance numbers, especially when they look significantly more attractive than they did, say, just a few months ago. To explain, let’s look at the average annualized return on the S&P 500 Index for the last 10 years – not including this week’s nasty selloff.

As of the beginning of last week, the S&P 500 Index had a 10-year average return of 14.7%. Pretty impressive, right? Yet at the end of last year (December 31, 2018), the S&P 500’s 10-year average return was only 8.5%. That’s a huge difference!

Here’s why. You remember the financial crisis and Great Recession of late 2007-early 2009 when the S&P 500 plunged just over 50%, marking the worst bear market since the Great Depression. The bottom in the S&P 500 came on March 9, 2009, just below 673 and it’s been up, up and away ever since.

The reason the S&P 500’s 10-year return looks so much better today than just a few months ago is because the last few really bad months of the 2007-2009 bear market have now rolled out of the 10-year time window. Starting in April, all of those losing months were gone.

No wonder the 10-year return looks so much better!

(Click on image to enlarge)

Many investors make decisions based on 10-year performance records, but as we can see in this example, the latest 10-year average for the S&P 500 may be misleading. Investors could easily think that they should experience average annual returns of nearly 15% (14.7%) going forward when that is not likely to be the case.

The disparity of 14.7% vs. 8.5% is huge. It gets even worse as we look back 20 years. The average annual return for the S&P 500 Index over the last 20 years ended in April was only 6.0%. That 20-year stretch included two major bear markets: the “dot.com” decline from March 2000 to October 2002 and the late 2007-early 2009 slide of over 50%.

Going all the way back to 1928, the annualized return for the S&P 500 was much better at 11.0%. But let’s face it: few (if any) people alive today have held diversified stock portfolios continuously since then, so that rich return may not be much of a comfort.

In the investment business, we repeatedly caution that “past performance may not be indicative of future results.” It’s true! But don’t expect the next salesperson who calls or e-mails you to point out why 10-year stock index returns look so much more attractive today than just a few months ago.