The Surprising Resiliency of the Stock Market

A recent report from J. P. Morgan Asset Management highlights a number of interesting facts, including this one: the S&P 500 index has exhibited a positive intra-year return in twenty-eight of the last thirty-seven years. In other words, 75 percent of the time since 1980, the S&P 500, which is the stock index most widely used by financial professionals to gauge the condition of the equity markets, has ended the year higher than it began the year. Admittedly, in some years, the gain was only 1 or 2 percent–and in some years (25 percent of the time) the return was negative, once showing a 38 percent loss. Not surprisingly, this occurred in 2008, when the implosion of mortgage-backed derivatives triggered the market meltdown that jump-started the Great Recession.

Given the above, the average intra-year return for the S&P 500 since 1980 has been 16.29 percent for those years in which it was positive. When we factor in the years of negative or no return, the average since 1980 is 9.5 percent in positive return, from January 1 through December 31 of each year (as this is being written, so far in 2017, the return on the S&P 500 is 8 percent). The aggregate return since 1980, after adjustment for inflation, is 552.81 percent. If all dividends received during that time had been reinvested, the total return rises to 1,637.35 percent. Remember, that includes the 25 percent of the time when stock returns were negative or zero for the year.

Why should we care about this? Well, the principal reason is that this underlines the long-term resiliency of the equity markets. The equity market, of course, consists of the public companies that manufacture, market, and provide the goods and services that we all depend on each day. These companies continue to do business through good economic conditions and bad. Each day, the best-run and most astutely managed of these companies find ways to improve how they do business. This continuous improvement and innovation is the engine that drives our economy forward, day after day. The aggregate of all that effort is reflected in the earnings that these companies generate, which ultimately is captured in the price of their stock: the value attributed to these companies by the thousands upon thousands of buyers and sellers who make up the stock market.

The other important fundamental fact emphasized by this information is the importance of efficient markets. As long as individual buyers and sellers are able to fairly exercise their collective judgment on the worth of stocks–judgment reflected in the millions of daily transactions–the markets will continue to function as they are meant to do. Such efficient markets are the investor’s friend. Over the long haul, these markets have been the number-one generator of wealth for everyone from the largest mutual funds to the individual preparing for retirement. Certainly, no one can guarantee any particular future result for the stock markets, especially for any given year. The markets go up, and sometimes they go down. But over the long term, they have proven exceptionally durable. And that is a very good thing.

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