FINANCIAL MARKET UPDATE 6.29.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

AVERAGE RETURNS ARE RARE

Over the last century, the US stock market has been a wealth-creating machine. With an average annual return of just over 10%, a buy-and-hold investor should have seen their money double roughly every seven years. $1,000 invested at the start of 1926 and held through the end of last year would now be worth more than $10 million!¹ Unfortunately, most mortal investors don’t have a century-long investment horizon, but compounding returns are still a very powerful force, even over shorter periods.

Investing in the stock market requires the investor to assume some risk. While stocks have generally earned a 10% return over time, one should not expect to earn that consistently from one year to the next. In fact, as the chart below shows, stocks rarely earn anything near their average return during a given year.  The green band illustrates a +/- 2% band around the long-term average of 10%. In the 95 years since 1926, the annual return has only fallen within the band on six occasions! Most years oscillate between very high returns and the occasional sizable loss.

Source: Morningstar Direct. Annual returns are from January 1926 through December 2020, and are based on the IA SBBI US Large Stock TR USD Index.

The famous investor, Howard Marks, has my favorite description for this pattern:

The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward the extreme itself that supplies the energy for the swing back.

Investment markets make the same pendulum-like swing:

  • Between greed and fear,
  • Between optimism and pessimism,
  • Between risk tolerance and risk aversion,
  • Between credence and skepticism,
  • Between faith in value in the future and insistence of concrete value in the present, and
  • Between urgency to buy and panic to sell.

This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at the “happy medium.”

Recent experience has certainly been consistent with Marks’ analogy of the pendulum in investor phycology. The S&P 500 returned over 30% in 2019, and optimism was high at the end of the year following the easing of trade tensions with China. In early 2020, the market experienced a significant drawdown as the pandemic and associated lockdowns caused panic among investors. Optimism returned fairly quickly, and the period that followed has generally been characterized as frothy, with substantial speculative activity within meme stocks, SPACs and cryptocurrencies.

It is critical for investors to understand the degree to which investor phycology can influence the market. The goal, however, isn’t to anticipate the swings in emotion in an effort to profit from them. The events that trigger the reversals are often completely unexpected. Instead, investors should simply recognize that these large swings are normal and are destined to repeat in the future. The challenge is to stick to your plan while others are being swept away in the currents of fear and greed. A difficult task to be certain. Those that are able to do this successfully put themselves in the best position to harness the wealth-creating ability of the stock market.

1. Based on the IA SBBI Large Stock TR USD Index

WEEK IN REVIEW

  • Last week new data showed that shipments of “core” non-defense capital goods excluding aircraft, a key component of business investment used to calculate GDP, increased by 0.9% in May (on pace for a 9.7% annualized rate in Q2). While this figure has slowed from the blistering growth rates upon exiting the pandemic lockdowns, it is still a very good reading.
  • On Friday, Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, was published. The figure showed a 3.9% YoY increase in prices, which is the fastest rate since 2008. The Core PCE figure, which strips out the volatile food and energy components, increased at a 3.4% YoY rate.
  • Economic data to be published this week includes an update on manufacturing sector activity and jobless claims on Thursday. The headliner for the week will be the Jobs report on Friday.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • What Investors Can Learn From the History of Inflation (WSJ)
  • ‘Great Resignation’ Gains Steam as Return-to-Work Plans Take Effect (CNBC)
  • Home Prices Surged in April at a ‘Truly Extraordinary’ Rate, S&P Case-Shiller Says (CNBC)

Investing

Other

  • The Apple-Microsoft Tech War Reignites for a New Era (WSJ)
  • The RoboTaxi Era Will Require a Rethinking of Vehicle Safety (Axios)
  • Apple Daily’s Closure Marks a Dark New Chapter in Hong Kong (The Atlantic)

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)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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