Year-End Reports Overstate Stock Market Performance – Here’s The Reality

The Wall Street Journal jumped the gun today using December 30 data for two 2019 performance articles, enthusiastically reporting:

The problem is calendar myopia

Remember the fourth quarter 2018 stock market sell-off? Well, The Wall Street Journal ignores it. Therefore, with a 2019-only focus, their analysis, conclusions and expectations are overstated and misleading.

Instead of reporting that 2019 is one of the best years (as we are bound to see in many similar articles), that significant drop leading into 2019 needs to be included. After all, the emotional selling climax gave 2019 its initial rebound kick.

Here is how the view changes by including that fifth quarter (results through December 31 close, including dividend income):

S&P 500

  • 2019 only = 31.5%
  • 2019 plus 4th quarter 2018 (-13.5%) = 13.7% (annualized = 10.8%)

Dow Jones Industrial Average

  • 2019 only = 24.9%
  • 2019 plus 4th quarter 2018 (-11.3%) = 11.2% (annualized = 8.8%)

Nasdaq Composite

  • 2019 only = 36.4%
  • 2019 plus 4th quarter 2018 (-17.3%) = 13.1% (annualized = 10.3%)

Note: Remember that the stocks in the S&P 500 and Dow Jones Industrial Average are selected to represent the overall U.S. stock market. As a result, they tend to track relatively closely. However, the stocks in the Nasdaq Composite are simply those that are listed on that exchange. The fundamentals (particularly sector and industry weights) are significantly different, so the Nasdaq can exhibit significantly different performance results.

Here are graphs of the two performance results (dividends excluded):

The dramatic reduction from the addition of one quarter to “one-of-the-best years” is an excellent example of why investors should look at more than one number.

Chart annotations: “Adding the 4th quarter 2018 sell-off changes the picture from a large runup to mostly a recovery plus a 4th quarter 2019 move into new high territory.

“After three failed attempts to move into new high territory, the three indexes finally succeeded.”

Remember what happened when President Trump first tweeted “tariff?”

The introduction of tariffs caused a dramatic change in the tax bill optimistic stock market. So, let’s look at how the market has fared since that January 26, 2018, event (dividend income included).

S&P 500

  • January 26, 2018 to December 31, 2019 = 16.9% (annualized = 8.5%)

Dow Jones Industrial Average

  • January 26, 2018 to December 31, 2019 = 13.2% (annualized = 6.7%)

Nasdaq Composite

  • January 26, 2018 to December 31, 2019 = 22.1% (annualized = 11.0%)

Here is the graph of that period (dividends excluded):

Do you see the bull market? Except for the fourth quarter 2019 breakout, it’s not there.

Chart annotation: “As U.S. companies have struggled with the global trade shakeup, stock investors have struggled to make forecasts and determine appropriate valuations.”

Another examination that is important is how the long-term picture looks. The ten-year period is best for that currently because it begins with 2010, after the 2009 sell-off and rebound have occurred (dividend income included).

S&P 500

  • January 1, 2010 to December 31, 2019 = 256.7% (annualized = 13.6%)

Dow Jones Industrial Average

  • January 1, 2010 to December 31, 2019 = 251.8% (annualized = 13.4%)

Nasdaq Composite

  • January 1, 2010 to December 31, 2019 = 343.1% (annualized = 16.1%)

Here is the graph for that period (dividends excluded):

Chart annotation: “The past ten years, while often labeled one, long bull market, include many reversals and shake-ups. Thus, the idea that ten years makes the market tired, extended and likely to fall is incorrect. All those bouts of weak and negative performance were readjustment periods. They allowed the market to establish a strong foundation on which to build the next bull leg.”

The bottom line

Looking only at the 2019 return overstates what the stock market has been doing. That misleading view can lead to one of two investor mistakes:

  1. Thinking prices rose too fast, thereby overvaluing stocks and increasing the risk of a correction
  2. Thinking the large rise is proof of a strong bull market at work

Both views are wrong, and actions taken in response could have undesirable results.

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