Every year I participate in a college football pool. There are 30 lawyers and me. I love college football. Or rather, I love the idea of the sport. I like the notion of pulling for your alma mater or hometown team, all the young people excited to be part of a group, and the unpredictable nature of amateur sports. But I don’t think for a minute that I’m better at picking winners than oddsmakers in Las Vegas.
When I come out ahead, I chalk up that victory to math, which is why my moniker is the Sightless Swine, or Blind Pig.
We talk about numbers in sports, the markets, and other things in terms of averages, implying smooth lines. In reality, things are lumpy. We get trends that stray from the averages for a while, but they don’t last.
If we flip a coin, the outcome is either heads or tails. If we flip several times, we’ll get each of those outcomes 50% of the time. But it’s unlikely that we’ll see an exact 50/50 split over the first 10, 20, or even 30 flips. Instead, we’ll get heads a few times in a row, or tails a few times. No one would attribute such a streak to brilliance or coin-flipping skill. As we add more flips, the results will gravitate toward an even split, or revert to the mean.
This year, the S&P 500 is up about 25%, making many of us feel pretty good as equity investors. If we simply sat in a broad index we did well, and if we picked some better performers then we scored even more success. In bond land, long-term Treasuries are up more than 6% for the year, and have earnrned an addition 2% in income. Everyone’s a hero!
But both markets are unlikely to repeat their performance next year, and that’s going to leave a lot of people looking, and feeling, pretty awful.
From 2014 through 2018, the S&P returnrned 13.69%, 1.38%, 11.96%, 21.83%, and -6.24%, respectively. On average, that’s 8.52%, which is within about 1% of the long-run average returnrn of large-cap equities of about 9.5%. If the markets end the year up 25%, then the average returnrn of just 2018 and 2019 would be 9.3%, which is even closer to the long-run average returnrn.
But great returnrns this year don’t mean we’re in for a repeat in 2020.
Over the last 100 years, the S&P 500 has earnrned 20% or more two years in a row just eight times, with three of those instances coming in the late 1990s. It could happen next year, but what would be the driver? Global growth is waning, the effects of tax reform have wornrn off, and the low-regulation President is on the impeachment block and facing a bruising election year. All critical indicators to where the markets could be headed in 2020, which Harry Dent dives into in his latest research.
It’s more likely that we get a year of modest returnrns, which will be painful for those counting on big investment gains through broad indices to meet their goals.
As for bonds, fixed-income investors rode the wave as 30-year Treasury yields dropped from 2.98% to 2.15%, pushing up prices. It’s not impossible, but it’s highly improbable that 30-year Treasury bonds dip from 2.15% to 1.32% next year.
There’s no doubt that the gains of 2019 will make many institutions, such as pension funds, feel much better about their unfunded liabilities as they see the gap close a bit, but it won’t last. As we go through 2020 and the standard mix of 60/40 equities and bonds delivers a total returnrn closer to zero than 20%, these same people will get nervous because their liabilities will continue to grow. In states like Illinois and Kansas, where public pension funding stands at 38% and 34% of the assets needed to pay the bills, one year of great returnrns isn’t going to move the needle.
They won’t change course, but individual investors can.
If you’ve banked some good money over the past year by floating on the rising tide, be happy with your good fortune and then make a plan.
Charles Sizemore has also made it his mission to help readers build consistent reliable income for retirement in Peak Income.
It’s likely that 2020 will be a year that favors stock pickers over those who simply ride the averages. As we go through the final weeks of the year, now is a great time to map out your investment strategy for the coming year.
As for football, I finished this year tied for second, which is fabulous. But I don’t count on my luck holding through the bowl series, or carrying over to next year. I’m just happy to have found an acornrn.