Over the last 100 years, the US stock market has proven itself to be a reliable engine of wealth creation. Since 1926, US stocks have averaged a return of about 10% per annum, which is enough to double the value of an investment every seven years. Investors that are successful in getting invested and staying the course have the potential to benefit from this powerful force of compound returns. For some, this is much easier said than done. One of the great challenges in investing stems from how much the rate of stock market returns can deviate from one period to the next.

The chart below, from Dimensional Fund Advisors, illustrates this challenge. It shows yearly returns for stocks going back to 1926. What strikes me about this chart is that the return rarely falls within this range. The market’s return only came within 2% of the long-term average (shaded green bar) six times during the past 97 years.

While stock returns have historically averaged about 10% per annum, it’s rare to be anywhere near that level in any given year. As it turns out, the stock market oscillates between frequent large gains and relatively infrequent losses. This pattern can play with investors’ emotions, creating the fear of missing out when stocks are soaring and the fear of losing everything when they are falling. Investment decisions based on these emotions often lead to undesirable outcomes as investors get more aggressive near the market top and sell investments near the bottom. It pays for investors to be aware of this pattern, stick to their financial plan, and not be driven by emotion at the extremes.

Week in Review

• The Bureau of Labor Statistics (BLS) published updated inflation data on Tuesday. Headline CPI came at +4.0% YoY, declining from 4.9% in April (as expected). Leading the fall was a decline in energy prices. Core CPI, which excludes the volatile food and energy sectors, was 5.3% YoY.
• The Fed began its two-day meeting on monetary policy Tuesday. Officials have been alluding to a pause in interest rate hikes at this meeting, with the potential for an additional hike in July. The inflation data reported today, which was largely in line with expectations, likely increased the odds for this outcome. The fed fund futures market is currently pricing in a 92% chance that rates will be left unchanged when the Fed announces its decision at 1 PM CT on Wednesday.
• Additional economic data to be released this week includes the Producer Price Index (PPI) on Wednesday, retail sales, industrial production and jobless claims on Thursday, and consumer sentiment on Friday.

Hot Reads

Markets

• Jerome Powell’s Big Problem Just Got Even More Complicated (WSJ)
• Inflation Rose at a 4% annual rate in May, the Lowest in 2 Years (CNBC)
• Jobless Claims Increase More Than Expected to Their Highest Since October 2021 (CNBC)

Investing

• Thematic Investing: Just Say No (MorningStar)
• Paying Attention (Morgan Housel)
• Can We Have a New Bull Market With 3% Unemployment (Ben Carlson)                                                       

Other

• Cyber Scammers Target parents, Grandparents for Digital Theft - 60 Minutes (YouTube)
• What’s The Best Golf Ball for You? Take Our Quiz To Find Out (Golf Digest)
• Microsoft’s Satya Nadella Is Betting Everything on AI (Microsoft)

Markets at a Glance

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Economic Calendar

Source: MarketWatch

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