Global markets have soared in the first two months of the year. Investors have regained their confidence in the Federal Reserve’s monetary policy, and markets seem to have priced in optimistic scenarios playing out in the global landscape. As we near the ten-year anniversary of the market bottom during the Great Recession, it’s a good time to revisit what “volatility” means in terms of return.
U.S. Large Caps are up 12.3% year to date1. This is not exactly a calm market. A jump of this magnitude could be considered volatile, but not many people discuss volatility on the upside. Volatility just describes the fact that long-term average annualized returns do not come in neat, evenly-sized annual returns each year. Volatility is captured by standard deviation, which is the main measure of risk for asset classes, particularly equities. When we examine how “risky” an asset is, we are usually looking at the math that shows how much individual year returns vary from long-term average returns. For example, the table below shows the annual returns for the S&P 500 since 2008. The math works out that the average annualized return over the last ten years is 16.7%, so this shows that if you had invested in this index ten years ago today and didn’t touch it, you would have earned 16.7% per year for the last ten years, although you wouldn’t have earned 16% every year.
|
Year |
S&P 500 Total Return |
|
2008 |
-37.00% |
|
2009 |
26.46% |
|
2010 |
15.06% |
|
2011 |
2.11% |
|
2012 |
16.00% |
|
2013 |
32.39% |
|
2014 |
13.69% |
|
2015 |
1.38% |
|
2016 |
11.96% |
|
2017 |
21.83% |
|
2018 |
-4.38% |
|
2019 YTD1 |
12.3% |
Ten years ago, there was no appetite for risk. Several smart people were predicting a depression, and it’s very easy to imagine a case in which things turned out much differently. The Dow Jones and the S&P 500 hit their bottom on March 9, 2009, but Gross Domestic Product (GDP) actually got worse after this! Investors didn’t receive a report of positive GDP until early 2010, when the fourth quarter of 2009 reported a meager 0.2% gain. In 2011, economists were worried about a “double dip” recession in the United States, and while GDP growth did dip below 2%, the economy has continued to post positive GDP growth since 2009.
Other global economies did experience a second recession. In fact, Europe posted negative quarterly GDP growth from the end of 2011 until the second quarter of 2013. All this to say that it is extremely difficult to predict what markets will do in the short-term, but we have a lot of confidence that equity market returns will be positive over the long-term2.
If you look at the return in 2011, when investors were very skittish, it is still positive. And if one had pulled money out of the markets in 2011 in expectation of a global slowdown (which, in fact, happened!), it would have been difficult to get back into the markets. If you waited to reinvest when the news turned positive, as it did in the middle of 2013, you missed out on huge returns in 2012 and 2013. There is an old adage in investing that goes, “time in the market is more important than timing the market.” This is so true. As we look back ten years ago to when the market bottomed and has since given investors returns of over 16% per year, remember that you had to be invested over that whole time period to experience this. When volatility returns on the downside, keep this long-term perspective in mind.
1 S&P 500 Performance as of March 1, 2019.
2 Past performance is no guarantee of future performance.