Where Do We Go From Here

Now that we’ve turned the calendar to 2020, we can look ahead to what the coming year may bring.  Any attempt to forecast the future in highly volatile processes like financial markets is fraught with attendant skepticism.  Events occur that effect the market and by nature all of the events which move markets are unexpected, that’s what moves markets.  President Trump orders a military strike on Iran and the market erases its gains from the prior day.  Unexpected event triggers market reversal.  But is there anything we can divine from last year or upcoming events this year that may prove useful in assessing this year’s outlook?  Let’s see…

Last year was notable for being a very solid year for the stock market, with the S&P 500 up about 30%.  So, what does that tell us about what to expect this year?  Looking back 92 years, the average annual return of the S&P 500 price index was 7.67% and the standard deviation of returns (a measurement of volatility of returns) over that time was 18.97%. 

How do large up years in the market effect those numbers, you may ask?  Well, if we exclusively look at the returns of the year following a big up year, we discover that the average returns of those years are slightly lower than the average return of all years—5.95% vs 7.67%.  The standard deviations of the two measured instances are nearly the same.  Not much to glean from those numbers.  However, since 1980 there have been 9 other years when returns were greater than 20%, and in 7/9 of instances the following year was higher—with three of those years seeing the following year’s returns as impressive as the previous year’s returns.  So, if you’re looking for a something to hang your hat on you’ve got that.

One event in 2020 that we can be sure to expect is the November election.  Depending on the outcome, this definitely has the opportunity to move the market.  A victory by one of the more progressive Democratic candidates could really shake the market and cause consternation in the back half of the year.  On average, over the entire 92 year history of the S&P 500, election year market returns have been in line with the overall history of average returns and volatility.  However, if we begin in 1980, we see that average election year returns are only 4.76%, or roughly 38% lower than the market annual average.  2000 and 2004 were the two particularly tough years for the market, over that time, and neither of these two year’s negative returns can be laid at the feet of the outcome of the election. 

Neither of the two analyses I conducted provide any sort of definitive information on what the market will do this year.  I’ve only selected a couple potential factors which could influence the direction of the market.  However, regardless of the number of factors I choose to analyze to make a prediction it would still be about as good as just picking a number out of a hat.  When we seek to predict we necessarily only analyze events that we know, or are fairly certain, will occur.  Maybe we guess at the events outcome, but we are still fairly certain that the event will happen.  But what truly pushes markets are the things we don’t even know will occur or couldn’t possibly foresee.  That is why markets move and why they exist because if the future value was known there’d be no market at all.    

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