Stock Market Perspective

After the bear markets of 2000–2002 and 2008, we seem to have entered an era in which investors wonder whether a market collapse is right around every corner, even following new market highs. The S&P 500 Index achieved a new high at the end of the first quarter, closing at 1,569 after beginning the year at 1,426, but has experienced considerable volatility surrounding the events in Boston. So, is it reasonable to fear a severe market downturn given this generally good performance in tandem with recent events?

LongerTerm Perspective

Over longer periods of time, we know that the

world’s stock markets have generally gone up. Over the period of 1900–2012, stocks outperformed inflation by about 5.0 percent per year. From a simple point of view, this means that new stock market highs have been the norm and not the exception. In one way, this reflects the triumph of capitalism and the general improvement in living standards the world has enjoyed as time has marched on.

Specific to the current market, the S&P 500 hit its previous high of 1,565 in October 2007. Prior to that, it had hit 1,527 in the early 2000s. This underscores one other reason why recent market highs do not imply markets are due for a correction. Namely, it is important to realize that the first quarter stock market high was barely higher than levels the stock market reached more than 10 years ago.

Said differently, while the stock market did achieve a new high at the end of the first quarter, from a longer-term point of view, the market has barely gone up for more than a decade. In fact from the high of the early 2000s through the end of the first quarter, the S&P 500 returned just 2.1 percent per year. This is hardly indicative of a market that is “clearly” due for a correction.

With respect to recent volatility, virtually every year has a period of time when markets do poorly and volatility increases. For example, during the great stock market performance of the 1990s, the S&P 500 had quarters when it was down by 13.7 percent, 9.9 percent and 6.2 percent. So, periods of higher volatility do not always precede poor performance.

Reasonable Expectations

Organizations are wise to factor in their risk tolerance when determining how much to allocate to stocks. They should set reasonable expectations for long-term stock market performance when planning for spending and other goals and objectives.

While stocks have outperformed bonds by about 8 percent per year over the long-term history of the U.S. market, the general consensus is that investors should plan for stock returns to be around 4–5 percent higher than bonds on a forward-looking basis. Organizations that assume returns will be significantly higher than this will likely be disappointed.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2014, The BAM ALLIANCE

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