The Stock Market In 2019: Last Year's Decline Not A Good Forecast

Stocks were down last year, as everyone knows. Does this mean that another decline will follow in 2019, or does it mean that we are poised for a rebound? The historical record is clear that the most likely outcome is no different than if we had enjoyed a “normal” year in 2018.

We’ve got good data on stock market returns since 1926, counting both price changes and dividend earnings. The good news is that over the long haul, stocks (measured by the Standard & Poor’s 500) return about ten percent per year.

What do stocks do after a down year? Let’s pull out all the down years from 1926 through 2017, of which there were 24. The average return in the year following a down year was ten percent, the same as the overall average.

Stock market total returns, 1926-2018


Stock market returns swing pretty widely from year to year, as all experienced shareholders know. The after-decline years are no different. Sometimes the market keeps going down for several years, as in 1929-1931, 1939-41, and 2000-2002. But sometimes it bounces back substantially, such as in 1991 and 2009. So it is not easy to know just what this year will bring from knowing what last year brought.

Many people can point out the negatives: the large federal deficit and accumulated debt, trade wars, presidential uncertainty, and on and on. But having disappointing facts is not enough for a forecast. One has to know that the bad news is not already priced into current prices. If you are the only investor who knows about the budget, trade policy, and President Trump, then you should act on your knowledge. But if there might be another one or two million other investors who have the same knowledge, then the market may already be low, and no further selling is needed.

Uncertainty about the future course of stocks is large, so investors should fall back on a few fundamental principles. Diversification of investments reduces risk. That involves diversification among stocks, and also diversification across asset classes: stocks, bonds, and real estate.

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