“You can’t count on a repeat of that in 2020, especially with central banks seemingly wary of going too much further down the easing rabbit hole”, we wrote, on December 9.
“That” was a reference to blockbuster equity returns fueled almost entirely by multiple expansion.
The visual tells the story on a global scale.
To suggest you can’t count on an encore in 2020 is not to suggest that stocks can’t rise.
Rather, it’s just to say you’d probably be foolish to believe the S&P (for example) is going to rise another 25% in 2020 purely on a higher multiple coming off a 26%, multiple-expansion-driven rally the previous year. If you believe that, then you are saying stocks will rise more than 50% over a two-year period with very little in the way of earnings growth.
My point was simply that you need a contribution from earnings going forward, and with trade frictions and rising labor costs set to crimp margins, profits may struggle to meet even lowered expectations.
In any event, the good news is that if you look back at three decades of history, the S&P has tended to perform remarkably well in subsequent years after rising 25% or more.
The following visual is a bit convoluted due to the close proximity of blockbuster years in the 90s, but it shows years since 1989 when the S&P has risen 25% or more, plotted with the subsequent number of consecutive years with gains and the average performance over those years.
As you can see, the only miss was in 1989. The following year, the S&P fell nearly 7%.
A “cleaner” (if you will) way to conduct this exercise is with total returns, but most people don’t think in terms of total returns when they take a snapshot of equities, even if they should.
On Tuesday, Bloomberg’s Michael Regan noted that since 1989, there have been five years when the S&P logged a total return of 30% or more. Here’s what happened after each year:
2013: 4 years of positive return; average +12.2% 1997: 2 years; average +24.8% 1995: 4 years; average +26.5% 1991: 8 years; average 20.3% 1989: the SPX returned -3.1% in 1990.
As alluded to above, the Fed plays a role in all of this. And next year is an election year.
For reference, below is a look at Fed moves by year, with election years marked in red. Jerome Powell is expected to hold rates steady in 2020, but as the market was reminded on Tuesday, Donald Trump isn’t going to make that easy.
Read more: Jay Powell’s ‘Good Place’ Monetary Policy Sets Up Election Year Clash With White House
Tough to draw any other conclusion except that this market is totally out of whack . The reversion to the mean is around the next corner ….or the one after that…… but definitely one of those infinite corners that make up this low interest rate low growth mess that we are painted into… Good post H….