by Jason Norris, CFA
Executive Vice President of Research
Last year at this time investors experienced the worst equity selloff on Christmas Eve in the history of trading. This delivery of coal was due to concerns of an accelerating trade war and the Federal Reserve raising interest rates too quickly. In total, this led to a fourth quarter selloff of 19.8 percent … just under what prognosticators label a bear market. This resulted in the only negative year for the S&P 500, -4.4 percent, for the S&P 500 since the beginning of the Financial Crisis in 2008. December 2018 also saw retail investors liquidate over $29 billion in domestic equity mutual funds and ETFs. Fortunately, the panic selling was short lived, and stocks rallied almost 40 percent in the last 12 months. However, the average retail investor did not participate in this rally as they continued to liquidate over $160 billion in domestic funds and ETFs in calendar 2019.
Timing stock market tops and bottoms is a fool’s game. On any given year, we have experienced at least one pullback in prices of 13 percent. However, unless there is a recession resulting in a bear market, these selloffs are usually brief (see chart). 2019 saw a minor pullback in the spring of around 7 percent, but that was brief, and stocks continued their grind to a 30-percent-plus return for the year.
Since 1925, U.S. large cap stocks (the S&P 500) have returned on average 12 percent. Renowned investor Peter Lynch has offered the following advice, “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Equities: The Gift That Keeps on Giving the Whole Year
Ferguson Wellman believes that investors can earn another positive return by staying invested in equities in 2020. After such a strong year, market participants may be tempted to sell. While we don’t believe the market is cheap, we do not think it is expensive either. Corporate earnings should be positive in 2020, and that should support equities. Finally, since 1925, the S&P 500 has returned over 25 percent over 24 different years (excluding 2019). On average, the market returned 11 percent the following year, and was positive two-thirds of the time. Historically over that period, the S&P 500 has returned on average 12 percent. Will there be a pullback in 2020? Yes … As to when and to what magnitude, we don’t know. However, since we do not anticipate a recession, we would not recommend selling.
Week in Review and Our Takeaways:
Stocks continued their march higher this holiday week as investors tried to capture gains before year-end
The S&P 500 finished up just under 1 percent and the 10-year U.S. Treasury yield fell to 1.87 percent