2017 Returns in Context

With 2017 in the books, rave reviews are rolling in for global stocks’ performance. Headlines tout “soaring stock prices across the globe” in a “bumper year” for markets. It seemed “impossible to lose” no matter where one invested. The US had an “epic year”—or was it “exceptional”?—with European equities doing even better.^[i] Enthusiastic coverage like this might have you thinking last year was an uncharacteristically great one for markets—and one 2018 will struggle to match. But history shows big years like 2017 aren’t out of the ordinary during a bull.

First, the numbers: Global markets rose 22.4% last year including dividends (20.1% if you strip out dividends).^[ii] Yes, this more than doubles the oft-quoted ~10% average annualized return for the S&P 500 since 1926, which many shorthand as “stocks’ long-term average return.” But that figure includes bear markets, making it a subpar reference point for judging a bull market year’s potential awesomeness. Since a smaller number of hugely negative years weighs down the average, the 10% figure obscures stocks’ behavior during a bull. A better comparison is global stocks’ 17.6% average annualized price return in bull markets.^[iii] 2017 was only modestly above this. Moreover, averages are made up of extremes. Some bull market years are just so-so, but many top the average. Since 1926, 21 years—nearly a quarter of the total—have exceeded that 17.6% average. 2017 was a departure from the three consecutive mediocre years that preceded it. But it still isn’t out of the ordinary. In late-stage bull markets—like this one—rising optimism leads folks to bid up stocks. Large returns are normal during a bull market’s final third. In 1998 and 1999, global stocks rose 22.8% and 23.6%, respectively. In 1980, they notched a 21.7% gain.^[iv] All these years came in the final third of their respective bull markets.

While stocks’ returns in 2017 weren’t extraordinary, there was one striking feature: very little volatility. The S&P 500’s average daily move (up or down) was just 0.3%^[v]—about half of 2016’s average and the smallest since 1964. No day’s return exceeded 2% in either direction, and US stocks rose in every month. Global markets gained in every month but August.^[vi] While volatility is impossible to forecast, it would probably be reasonable to expect more bounciness this year, maybe even a correction. Since corrections are sentiment-driven and impossible to time, they typically punish investors who try to dance around them. We wouldn’t try it. More broadly, though, higher volatility in 2018 could easily coincide with a great year for stocks. Volatility cuts both ways. Higher volatility can mean more upside volatility, too.

Volatility or no, investors’ mental picture of 2017 is one reason we believe this bull markets still has room to run. That so many see it as a rollicking, tough-to-replicate year for stocks—despite relatively typical bull market returns—illustrates how far removed investors are from the euphoria often accompanying market peaks. If they were actually euphoric, folks wouldn’t greet 2017’s solid but by no means “epic” returns with a mixture of surprise and resignation for a tepid 2018. Instead, they would probably spout illogical reasons why stocks could soar higher and faster for eons. (See bitcoin to get a sense of what this looks like.) So although sentiment is warming presently, euphoria doesn’t seem to have arrived yet. Bull markets can run for a while—and produce above-average returns—before it does.

[i] In dollar terms at least.

[ii] Source: FactSet, as of 1/2/2018. MSCI World Index return with and without net dividends respectively, 12/31/2016 – 12/31/2017.

[iii] Source: Global Financial Data, Inc. and FactSet, as of 12/28/2017. Annualized price returns in USD. GFD World Index used for bull markets from 1926 – 1970; MSCI World Index from 1970 – 10/30/2007. The MSCI World Index’s 2017 price return in USD was 20.1%.

[iv] Source: FactSet, as of 1/2/2018. MSCI World Index return excluding dividends, 12/31/1998 – 12/31/1999, 12/31/1997 – 12/31/1998 and 12/31/1979 – 12/31/1980.

[v] Source: FactSet, as of 1/9/2018. S&P 500 Index return excluding dividends, 12/31/2016 – 12/31 – 2017.

[vi] Source: FactSet, as of 1/9/2018. MSCI World Index return excluding dividends, 12/31/2016 – 12/31/2017. The MSCI World Index with net dividends gained 0.14% in August 2017, but it fell -0.07% in price terms.