The Bull Stock Market Needs to Give Credit to the Calendar
Returns this year look stellar, but only because equities collapsed the last month of 2018.
Bloomberg, December 17, 2019
Major U.S. stock markets, depending on which index you prefer, are up anywhere from 21% to 33% this year. Those are big gains, making this one of the best years ever. The results should include ripple effects for real estate and retail, as giant incentive fees, profit sharing and big bonuses work through the economy, benefiting everyone.
Well, not exactly.
Looking at market returns on a calendar-year basis can be misleading. Let’s use the broad benchmark of large U.S. equities, the S&P 500 Index, as our example. From the market close on Monday, Dec. 31, 2018, until today, the S&P 500 has gained 27.4%, or 30% including reinvested dividends.
But let’s use a slightly different time horizon — not a lot — starting from the Sept. 20, 2018, peak rather than the last day of last December. On that basis, the S&P 500’s returns have been almost 9% (more than 11% with dividends) and 9.4% on an annualized basis. Not bad, but not super either. What gives?
Much of the gains in this years’ markets are a quirk of that 2018 fourth quarter, which was a debacle no matter how you look at it. For a variety of reasons (recession fears, trade war concerns, Federal Reserve tightening, liquidity issues, volatility in repo markets and so on), U.S. stocks flopped into a 20% slump at year-end. That almost perfectly dovetailed with the calendar, and the market low landed on Christmas Eve day. The markets began to recover soon after. The result of that timing: Most of this year’s powerful market returns — almost 90% of them — are a recovery from that fourth-quarter plunge. Just by way of example, a 20% retreat requires a 25% rise just to break even.
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I originally published this at Bloomberg on Bloomberg, December 17, 2019. All of my Bloomberg columns can be found here and here.
