Watching the EKG

Over the years, I’ve come to understand that many investors’ image of the stock market resembles an EKG where the market is up, then down, then up, then down, etc.  As you can see from the chart below, the reality is quite different.  The stock market certainly has up years and down years, but nothing about this chart resembles the monitors we see in hospital rooms.

Since 1950, 79% of all stock market years have been positive.  This means that 4 out of 5 calendar years have provided gains to investors.

This dynamic is surprisingly consistent; if we go back the 90+ years where we have detailed stock market data, we see the same 80 percent-ish figure.  But, this does not necessarily mean that our EKG image is a bad one.   What happens to the stock market in the year following an up year?  Of the 55 good stock market years, how many were followed by good years?  The answer: virtually the same percentage.

OK, a good year in the stock market tells us nothing about next year’s performance.  But, what about the bad years?  Shouldn't we be investing heavily when the stock markets are down (and our hearts are beating more quickly)?  What percentage of the 15 bad stock market years have been followed by good years?  The answer: virtually the same percentage, again!

So – the U.S. stock market gained 31.5% last year and this tells us… nothing about what to expect this year.  When it experienced a downturn in in 2018, that told us… nothing about 2019.  Unfortunately, there is no projecting short- or long-term performance based on short- or long-term performance.  In fact, there is no projecting short-term performance by any measure and predicting long-term performance with anything other than “probably higher/lower than average” is questionable at best.