The 10 Best & 10 Worst Years
Mebane Faber provided some insightful analysis regarding "real" (net of inflation) market returns for domestic stocks over rolling 10-year periods dating all the way back to 1871 on his website. Using his analysis, here are the ten best and ten worst 10-year periods sorted by era:
Date "Real Return" "Market Valuation"
12/31/18 17.7% 5.93
12/31/19 15.7% 6.11
12/31/20 15.8% 4.72
12/31/46 15.7% 11.43
12/31/48 18.1% 9.88
12/31/49 17.0% 10.49
12/31/51 15.1% 12.29
12/31/88 16.1% 14.68
12/31/89 15.3% 17.82
12/31/90 14.8% 15.86
Average 16.1% 10.92
Date "Real Return" "Market Valuation"
12/31/1909 -3.0% 15.16
12/31/1910 -4.7% 12.99
12/31/1911 -2.4% 12.82
12/31/64 -4.0% 22.87
12/31/65 -2.5% 23.80
12/31/67 -2.7% 21.93
12/31/68 -3.6% 21.60
12/31/71 -2.3% 17.02
12/31/98 -3.9% 39.87
12/31/99 -3.5% 45.08
Average -3.3% 23.31
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Making Sense of it All
There are at least three meaningful takeaways from the tables above.
1. "Market Valuation" cannot be ignored. It is a primary determinant of future returns.
The current "Market Valuation" of the S&P 500 as of August 1st is 20.9. That is about double the valuation of the average of the ten best years, and slightly less than the average of the ten worst years.
What does that mean looking forward? Using history as a framework, the "real" return of US stocks over the next 10 years will probably be in the low single digits.
2. Stocks tend to move in very long-term cyclical patterns.
Historically, we have experienced long-term bull and bear markets lasting for 15-20 years at a time. That is why the ten best years tend to be grouped together and are spaced 30-40 years apart. We are about 13 years into the current long-term bear market.
3. Picking the best years is not intuitive, at least not based upon current events.
Waiting for a low "market valuation" before investing will likely be counter-productive. However, being more "tactical" and conservative with your investments during bear markets and high market valuations can prevent big drawdowns.
Of course, using alternatives to traditional stock and bond mutual funds may also prove to be beneficial to your overall portfolio.
If you haven't done so already, we would be happy to review your portfolio and provide some insightful feedback. Perhaps the 10 best years for your portfolio are right around the corner!
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