Have markets partied too hard? With world and US stocks up 18.2 per cent and 23.7 per cent, respectively, year to date through to October 29, wrong-headed bears see above-average gains as signs stocks are overheated.
Wrong! Strong returns aren’t barriers to more good times. These returns, as I will show you, are smack dab average.
Investing is error-prone. Anchoring to long-term average returns is a big one. When stocks outrun the S&P 500’s annualised average – about 10 per cent in USD – folks get twitchy. They presume worse ahead to revert returns back to average. Big upside must cap future gains!
But consensus concepts of “average” don’t imply frequent. The S&P 500 usually returns far higher or lower than that. Averages blend together volatile extremes, combining mostly big positives with fewer negatives.
Long term, average returns aren’t normal – extreme returns are. Hence, current strength is shockingly normal. Whatever stocks do now, through 2025, good or bad, won’t be because of returns year to date.
Stocks rise big far more often than fall. Using America’s S&P 500 for its global importance and longest accurate history, since 1925, stocks gained in fully 75.2 per cent of all rolling 12-month periods through September (in USD).
Yet, returns are often wild year to year. To see that, bracket together calendar year returns into ranges: exceeding 20 per cent, 0 to 20 per cent gains, 0 to -20 per cent declines and -20 per cent or uglier.
Since 1925, US stocks rose big – above 20 per cent – in 37 of 98 years – the most common result! Next most frequent? Up less. Zero to 20 per cent gains happened 35 times.
Negative years – down between 0 and -20 per cent – were less common – 20 times. And down more than -20 per cent? That occurred just six times. So, US markets posted huge gains six times more often than big declines!
Alternately, US stocks beat their 10 per cent long-term average in USD in 58 of 98 calendar years. They fell – at all – less than half as often, 26 times. That makes 2024’s big year-to-date returns start to look more common, less curious.
Long-term average returns are quite rare. Consider recent history. US stocks haven’t gained between 5 per cent and 15 per cent since 2016. Overall, it happened in just 17 per cent of S&P 500 years since 1925. Hence, that “average” year happens only once of every six years!
Recently, many fixated upon 2022’s negativity. But what of 2019’s 31.5 per cent S&P 500 USD boom. Or 2021’s 28.7 per cent climb. Or 2023’s 26.3 per cent jump. All were “extreme”. Ironically, 2020 was the closest to “average” in that stretch, as US stocks rose 18.4 per cent.
But would you call anything about 2020 nearly “average” or “normal?” No. The S&P 500 plunged 33.8 per cent in USD from February 19 through March 23 amid Covid lockdowns. Hardly “normal”! Then it soared 70.2 per cent from the March low through year end. Also extreme! The cumulative 18.4 per cent return feels slightly above average but masks a wild ride.
Whether you are in a bull or bear market makes a huge difference as to what sort of returns you might normally expect. In bull markets, stocks rise and by definition must be commonly above average.
In a bear market, they fall – below average. Sounds childishly obvious. It isn’t. Few ever stop to think: “I’m in a bull market, so returns should average far above long-term average returns.”
Most investors cling to that average return for all years, making bull market gains look too big, too fast. Nearly every bull market features such fears. But big returns in bull markets are “normal”.
US stocks’ roughly 10 per cent long-term annualised average includes all bear markets, even the worst of the worst. To outstrip the massive down years and reach that 10 per cent annual average, the up years must be way, way up.
Hence bull markets alone have averaged 23 per cent annualised – a fact few seem to even know. Note: 2024’s 23.7 per cent result, so far, is right there, smack dab on that average – nothing more.
Seemingly “extreme” positives within bull markets underpin the “average” returns bears latch on to.
Not that 2025 is a sure-fire winner. Falling uncertainty after America’s election should power returns near-term, but risks could lurk later.
I’ll address that here month to month ahead. But those risks don’t include 2024’s big returns. And the backdrop has plenty of positives, too. If bad times await, it will be because new, unpriced risks outweigh those positives, not because this year was too hot.
Regardless, when you realise robust gains aren’t abnormal, you see “too far, too fast” fears are faulty. The climb in 2024 is terrifically typical.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $285 billion of assets under management
