A question we get asked repeatedly (and especially during volatile years!) is this: ‘What does the path of the stock market look like in an average year?’

Jim Reid, one of the Deutsche Bank investment strategists, shared a chart this week, mapping the average path of the S&P Index* since 1928.  Reid noted (with a thank you to his cohort Binky Chadha) that it is October which produces the most volatility, but that the volatility tends to settle down as prices rally in the final months of the year. It may come as a surprise considering all the drama of 2020 but Reid expects that this year will be similar to years past. Markets tend to care less about who wins an election than that the question of whom it will be is answered. Markets tend to care less about who wins an election than they are about the possibility of an uncertain outcome.

‌ So, have a close look.  On average, stocks begin a year at some level and proceed on a bumpy path which ends the year much higher. Now, about 2020; this year is most certainly unprecedented, considering all the nasty stuff that has happened. And there’s no way I’m suggesting that the nasty stuff isn’t…nasty.

But there’s been a lot of bad stuff since 1928.  We’ve seen wars, civil unrest, asset bubbles, natural disasters, financial crises, viral outbreaks, and on and on.  AND, many of these events have given way to contractions in the markets, hugely falling corporate profits and certainly falling stock prices.  (Note of compliance here- Investors need to pay attention to this stuff as uncertainty and volatility is part of investing!)

However, despite all of the good and bad times, people continue to want a better life experience, and that includes owning better things and using better services. This results in a monstrously bullish force that drives growth and innovation and all else that drives the earnings which result in higher stock prices.

And remember also that the market is not a static set of companies. The markets of the 1920’s and 30’s certainly didn’t include Microsoft, Apple, Tesla or Zoom! Companies that were once big winners shrink and disappear and are replaced with new companies that offer new (and better) goods and services for consumers to desire – which is why markets can and do go up as individual names disappear.

So, as we’ve mentioned here before, there will be large bouts of volatility and sometimes extended periods of lower prices. Personally, I feel that the market has priced in a pretty high bar for earnings growth to justify the current prices, especially considering the many current problems in our economy.

But bottom line, barring some sort of collective long-term change in consumer psychology or a massive change in the rules that govern US-based businesses, the long-term outlook for stocks continues to look pretty bright to me.


Ron’s Market Minute – Change is Constant

In spite of the disruptiveness of almost everything this year, markets are positive for the year (so far) and our current environment is continuing to support equities.  Rates are low, inflation is minimal, and we have had monstrous amounts of stimulus injected into the economy.  (And of course, the fact that the Fed has made a point that they plan to keep rates low and push for more stimulus.) That suggests that the companies that have been thriving are likely to continue, although we remain vigilant in watching for changes in market leadership. 

Of interest very recently (2 weeks), we are seeing smaller stocks (‘small-caps’) once again push for strength. Note the comparison of the small-cap index IWM in red vs. the ‘market’ as represented by the SPY or S&P500 Index* shown in green in this chart.  The small-cap index is up 12% vs the 6% gain in the SPY over the past two weeks.

When smaller stocks take the lead over their larger brothers, it is an indication that investors are leaning more toward a ‘risk-on’ posture, and in turn are buying more stocks which pushes stocks upwards. In addition, we are seeing markets broaden out — whereas earlier in the year only a few sectors were dragging the returns upward, recently all of the sectors except energy are contributing, which typically makes for a smoother ride and a healthier market environment.

As I said this has indeed been an unprecedented year. But with time we are learning to better work and play with the virus environment through better processes (social distancing and cleaning methods). Many uncertainties remain in the short term.  However, for the longer term, it is obvious to me that the healing is now in full swing and the stage is set favorably for equities.

Also, the calendar has entered its historically strongest period; the final quarter of the year. It may be a bumpy ride, but we expect to see continued positive returns by the end of this year.   

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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Past performance is not a guarantee of future returns.