Here’s all you need to know. (If you’re in a rush.)
- US stocks rose nearly 2% in July, declined nearly 2% in August, and then rose nearly 2% again in September. In other words, if you look simply at the start and finish of the quarter, stocks did practically nothing, despite weeks of sharp, sometimes nerve-racking ups and downs in between.
- As expected, the Federal Reserve cut interest rates in hopes of boosting a slowing economy that continues to be impacted by global trade uncertainty.
- Despite talk of recession, further interest rate cuts, no end in sight to trade tensions with China, and more political scandal and election uncertainty in Washington, most fundamental economic figures remain strong, as we enter what is often one of the strongest quarters of the year for the economy and the stock market.
- Pro tip: If reviewing performance of any investment account, make sure you understand the context of the time frame you are evaluating, especially when we’re talking short periods of time (which you really shouldn’t be doing very often!). For example, 1-year performance can be much different than year-to-date performance, particularly when you look back on the most recent 9-12 months we’ve experienced. For more on this, keep reading…
And now for the long(er) version…
While there were plenty of ups and downs in between, the last three months left US stocks almost exactly where they were to begin the quarter. There were more headlines of possible recession, the largest single-day spike in oil prices ever after an attack in Saudi Arabia, more China/US trade “Will they? Won’t they?” talk, interest rate cuts, and now even a Presidential impeachment inquiry by Congress (in case you haven’t heard). The outlook for any of this getting sorted out by the end of the year, is foggy at best.
Despite all of this, the historic bull market in US stocks has held strong and there are still very few fundamental economic signs that we are currently in, or nearing, an actual recession in the coming months.
August was probably the biggest test of investors’ will-power, as we saw several significant declines during the month, that had the feel of a pre-recession crash for some. Yet, here we are in October, basically unchanged from the end of June.
While the stock market was essentially flat for the most recent quarter, we can also look back much further and see that major US stock indexes are currently sitting about exactly where they were on this same day LAST YEAR!
Although the stock market has risen close to 20% for 2019 so far, that isn’t the full picture your returns are likely telling you. Confused yet? Good. Stay with me. Visuals to come.
Short-term performance: It’s all how you look at it.
As we enter the 4th quarter each year, we often notice an uptick in clients looking for help understanding their returns for the year so far. A common question we get from clients goes something like the following:
“Hasn’t the stock market been doing extremely well this year? If so, why am I noticing that my account is only up 2% this year, when my co-worker was talking about getting 15-20% on his/her account?
When logging into any 401k account, many will stumble upon a return percentage, front and center, with a “YTD” or “year-to-date” reference next to, or below it. Others may find a percentage with “1-year” next to or below it.
- Year-to-date – The performance of your account from January 1st of the current year through today (or the most recent business day).
- 1-year – The performance of your account over the last 12 months.
While you might assume these two numbers should be similar, there are times when adding or removing just a few months from the equation can end up showing you VERY different results, which in turn will make you feel two very different ways about how your account is doing.
Let’s start by looking at the year-to-date returns of US stocks for 2019 so far, as measured using the S&P 500 Index…
Year To Date Change
19% is actually the best 9-month start to any year since 1997. Not too shabby. But now let’s look at the 1-year returns for US stocks. See if you notice the reason for the huge difference…
1 Year Change
S&P 500 Index: Oct. 1, 2018 – Sept. 30, 2019
As you can see, when we zoom out wider to a 12 month view, one of the worst quarters for stocks in the last decade suddenly comes into the picture. That downturn at the end of 2018 ends up erasing a huge chunk of the gains you saw on the YTD chart.
By simply changing the starting point to last October, the resulting percentage drops by more than 16%. If this was an investor’s account and not the S&P 500 index, which of these two numbers do you think they’re going to share at the water cooler? Probably not the 2.15% number. So what is the average investor supposed to do with this information?
The lesson… None of this actually matters.
Getting caught up in the 9 month or 1 year returns of an account that should be globally diversified (not just US stocks/bonds) for the long-term, is just a recipe for more unneeded stress in your life.
The longer our timeframe gets, the more we see that the shorter periods are basically meaningless. But don’t take our word for it. Here are several return numbers for US stocks using numerous timeframes, for all periods ending 9/30/2019:
US Stock Returns:
30 years: +1,505%
First and foremost, it’s important to remember that a properly diversified portfolio should contain much more than just US stocks. But just for fun, let’s say you’re retiring today (congrats!) and looking at a chart of your nest egg balance over the last 30 years. You see that over the past 30 years, your diversified portfolio was able to grow by about 1,500%, hypothetically. On any chart showing that growth, you’re likely to see many peaks and valleys along the journey to today.
Now ask yourself this. Do any of those small, or even big dips in this imaginary chart upset you right now? My guess is, no. But in the moment, each decline may have actually felt like true doom and gloom.
The road to retirement is the scenic route.
What happens in one month or one year is just a small bump in the road when you’re able to eventually look back on your journey to retirement. The road to get there is never a straight line. It’s more of a winding scenic route. So why bother worrying if you have a proven long-term strategy in place?
Take it all in along the way if you want, but stay focused on the destination. As long-term, disciplined investors, we understand that we don’t get to build the road we travel. The market does that for us. We just need help finding, and then staying on, the best route for us.
We may get frustrated or tired here and there and take an exit that throws us off course, thinking we know a better way. But then we learn from each detour and find our way back on the path that’s best for us. Or at least, that’s the idea.
In Summary: Ear muffs!
Our 24 hour news cycle has a daily impact on stock market movements. That’s undeniable. But the noise of one day, one month, or one quarter, fades into the next and markets sort through the chaos over time.
It’s precisely BECAUSE the market is so chaotic in the short term, that patient long-term investors benefit and are able to experience better outcomes than those that let the noise of the world distract them.
Whatever it is you need to do to get your hands on some metaphorical noise-cancelling headphones, do it now. With a Presidential election and potential impeachment proceedings around the corner, the noise will only be getting louder from here. Your future self (and specifically his/her ears) will thank you.
1. As measured by the S&P 500, per CNN Money https://money.cnn.com/data/markets/sandp/
2. Total return includes reinvested dividends. Source: https://dqydj.com/sp-500-return-calculator/
Source for all charts: CNN Money https://money.cnn.com/data/markets/sandp/
The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed. Investors should consider their ability to continue investing through periods of fluctuating market conditions.