FINANCIAL MARKET UPDATE 6.9.2020

STORY OF THE WEEK

AVERAGE ISN’T NORMAL FOR STOCKS

The rally that began in late March remains in full force, with pockets of the stock market returning to positive territory for the year. Over the past few months, this wild ride has delivered one of the most rapid price declines in history, followed by a rebound that was nearly as fast. At this point, I think most investors are ready for things to get back to normal. For the stock market, however, “normal” is anything but.

The chart below illustrates yearly returns for stocks going back to 1926. The average annual return during this period was roughly 10%. The shaded green area in the chart represents the average return +/- 3% and provides us with a range for a “normal” return. What strikes me about this chart is that the return rarely falls within this range. Only 8 of the 94 years analyzed saw a return near the 10% level. Historically, the market has actually been more likely to deliver a return that could be considered extreme:

  • Number of years with a > 30% gain: 20
  • Number of years with a > 10% loss: 11

Source: Morningstar Direct. Data from 1926-2019. Stocks were represented by the IA SBBI US Large stock TR USD Index.

The stock market oscillates between frequent large gains and relatively infrequent losses. Historically, returns have averaged roughly 10% per annum, but it’s rare for the market to actually deliver that in a given year. This pattern can play with investors’ emotions, creating the fear of missing out when stocks are soaring, and often an even greater fear of losing everything when they are falling. Investment decisions based on these feelings often lead to undesirable outcomes as investors add risk near the market top, and liquidate 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.

While a return to normal could mean a break from the historic price swings we have experienced this year, it does not necessarily mean smooth sailing ahead. “Normal” for the stock market means prices will vary widely from the average. For investors to benefit from the long-term market gains, they must remain disciplined. 

WEEK IN REVIEW

  • On Friday, the Labor Department published the jobs report, which showed the economy added 2.5 million jobs during May (by far the biggest single-month gain in history). This was a rather shocking figure, as Wall Street was expecting another 8.3 million in job losses. The unemployment rate fell from 14.7% to 13.3%. While this positive news may signify that the economy is turning the corner, a single data point does not constitute a trend, and there could be downward revisions to this figure in the next report.
  • The National Bureau of Economic Research (NBER), the organization responsible for maintaining the breakpoints for the U.S. business cycle, announced that the U.S. has officially entered into a recession. Typically a recession is defined as two consecutive quarters of negative GDP growth. However, given the “unprecedented magnitude of the decline in employment and production and its broad reach across the entire economy,” the NBER determined the current downturn already qualifies. This recession ended the record 128-month expansion that followed the financial crisis in 2008.
  • After losing roughly 34% during the 21 trading days between February 20 and March 23, the S&P 500 moved back into positive territory for the year yesterday (6/8/20). It took the index 53 trading days from the market bottom to reach this point, though it remains slightly below the all-time high achieved prior to the selloff in February.

HOT READS

Markets

  • May Sees Biggest Jobs Increase Ever of 2.5 Million as Economy Starts to Recover from Coronavirus (CNBC)
  • The U.S. entered a recession in February, According to the Official Economic Arbiter (CNBC)
  • The U.S. Economy Is Now in Recession. Here Are 3 Things to Watch at This Week’s Fed Meeting (Barron’s)

Investing

  • This Bull Market Isn’t as Big as You Think (Zweig)
  • Five Tips for Recovering from Covid-19 Panic Selling (Bloomberg)

Other

  • Could Bruce Lee Win a Real Fight? (ESPN)
  • Pandemic Brings Out Kids’ Sneak Side: Forbidden Apps, Burner Phones (WSJ)

ECONOMIC CALENDAR

 

Source: MarketWatch

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 + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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