Roller Coaster Ride To Average

The stock market this year has taken an extraordinary route toward a pretty routine destination.  The first half of 2018 has gone from giddy to gut-churning to grinding. The first three weeks of January saw the best start to a year in 31 years, with the S&P 500 up more than 7 percent. The rally immediately gave way to the fastest 10 percent plunge from a record high in 90 years.

Since then, it’s been nearly five months of choppy, labored recovery, representing one of the longer periods of consolidation following a correction in recent years. The broad market has been stopped short of its March high, set on the initial rebound from the February drop, and the S&P remains some 4 percent below the January peak.  And yet the S&P is approaching the midpoint of 2018 with a 3 percent year-to-date gain, which dividends bump up toward 4 percent. Annualize that and you just about have the long-term annual average return for equities.

The market is behaving in a fairly typical manner in other ways, too. Very strong corporate-earnings growth near 20 percent has not nearly been fully reflected in share prices, which of course means the market’s price-to-earnings ratio has dropped. Despite jangled nerves over the increasing potential for a global trade war, domestic stocks are outperforming their global counterparts, suggesting the U.S. has the least to lose should the conflict escalate.

The history of years that managed even narrow gains by this date is pretty encouraging, as it happens. Research points out that since 1950, there have been 35 years when the S&P 500 was up at least 3 percent as of the start of summer (June 21). The remainder of those 35 years saw further gains 30 times, and only in 1987 was the loss through December more than 3 percent.

One quirk of market behavior is that an individual calendar year index return rarely falls within the range of the long-term average annualized return — say, between 7 and 11 percent. In fact, only five years out of the last 90 have seen a January-to-December return in that 7 to 11 percent range — with gains of 20 percent-plus or outright declines far more common.

So just because the first half of the year is on pace for that “normal” annual return, it doesn’t indicate the coming months will play out in such a neat-and-tidy way, as it rarely does.

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