Past & Future US Equity Performance

Everyone knows the bull market is 9 years old; it is the longest bull market ever. However, the length of the bull market is largely irrelevant because it came very close to ending. It’s arbitrary to say a bear market is a 20% decline, but not a 19% decline. Returns in cycles are more nuanced because they aren’t subject to arbitrary definitions.

The U.S. stock market’s rolling 10 year returns have been positive 95% of the time in the past 60 years. Looking at global historical returns, America has done well. Investing in US stocks is much different than investing in global stocks. America’s outperformance is partially helped by the poor performance of other countries as capital likes stable nations with consistent rule of law. The fact that the emerging markets are unstable give America a competitive advantage. It’s very difficult to forecast returns for the next few decades because no one knows how governments will act. However, it seems more likely that a stable country will stay that way than the probability of an unstable country becoming stable.

Not Many Declines

The prerequisite understanding that America is unique is important in contextualizing how unusual the performance has been. That doesn’t mean it will or won’t continue. The chart below shows an interesting perspective on historical returns. 

Source: Goldman Sachs

The 5-year rolling frequency of 3 month periods with less than -1% price returns is near the lowest in the past 80 years. Only the late 1990s was a less volatile time for investors. Hedging has been painful in the past 5 years. Short selling has become a lost art because of the long strong bull market which has rarely had sustained negative returns.

Better Returns? It Depends When…

Measuring returns depends on the time frame. There are many ways to review the same data. It’s best to review them all before making a prediction on where stocks will go. For example, the 20 year annual returns of the S&P 500 are 6.9%. Those are nearly the worst returns in history, but 15 and 25-year returns are 9.5% which is near the long-term average. Betting that low returns will improve has been a good idea. The chart below shows 15 year trailing annual returns were 3.76% in August 2015. Since then stocks have done well.