By: Ben Doty, CFA, Senior Investment Director, Koss Olinger & Company
If you have been around long enough, then you know that financial markets are not very steady in the short-run. They fall down, as they did between May and August of this year, when the price of the S&P 500, an index of large capitalization stocks, fell by 12.4 percent. You also know that they recover. Through the end of November, the price of the S&P 500 recovered 9.8 percent, making up most of this loss. In fact, since 1975, every significant correction resulted in a greater rebound. While history can’t predict the future, it can serve as a useful guide. If you have a nest egg or other investment, such price drops may be a unsettling, but if you have the patience and financial ability to endure, stocks have generally been a good place for cash allotted for future purposes. Your time horizon has to be a long one for history to be on your side. From 1926 to 2014, the annualized return of large capitalization stocks has been 10.1 percent.
2015 is poised to be flat-to-negative year, as of the end of November, in US stocks. If this year, or even next year, turns out to be negative, history has told us that there isn’t much probability to fear what will happen the following year. Negative years, in fact, are usually opportunities for animal spirits to clear out of the markets. Since 1815, there have only been seven consecutive years of negative returns, where one year of negative calendar year returns is followed by a second. These periods are in the table below. Negative calendar years that have followed a prior negative year only amount to 11. Out of 199 years, that’s only 5.5 percent of the time. Roughly, but not exactly, 94 percent of the time the next year ends up being positive. Interestingly, the 2008 financial crisis didn’t even make the list.
The darkest hour is just before dawn. The long-term history of the US stock market seems to attest to this and serves as an important reminder when the hour seems darkest, this year or any year.