So, here we are just barely 7 weeks into the new year and stocks have been on fire. Some of our all-equity portfolios are up over +13% year-to-date. The S&P 500 is up almost 11% thus far. At the risk of sounding like “Captain Obvious”, I’m going to say this trajectory of returns is probably unsustainable throughout 2019.
If you were to annualize these YTD returns, we’d be looking at roughly +80% performance for the year. I don’t mean to throw cold water on a fantastic start, but that’s probably not going to happen.
I’m not predicting a pullback, correction, recession, or anything of the sort. This is simply a recognition of where we are in the market. Straight-up returns right out of the gate usually have to come back down to earth at some point.
Considering the abysmal 4th quarter of last year, it makes sense that stocks would rebound so strongly. As you can see from the chart above, we’ve made up a huge chunk of the 2018 correction. As stocks sold off, we were feverishly selling bonds (which were doing well) and buying into the depressed stocks. This was mostly during the last couple weeks of 2018 and the first week of the new year. It’s worked out well, as equities have regained much of the lost ground.
When it’s all said and done, 2019 could very well turn out to be a stellar year for investors. It’s just important to view the year-to-date returns from a historical perspective. I turn to this chart often:
This chart shows the performance of the stock market (bars) and the largest intra-year decline (dots) each year. The average year sees a stock market drop of -13.5%. However, most years still end in positive territory, averaging 9% gains.
No one knows where this year will end up for investors, or what we’ll experience along the way. But that’s part of what makes investing so interesting.
We’ll do what we always do: stay diversified and look for rebalancing opportunities should they arise. In the meantime, it sure has been a refreshing start for 2019.