The folly of year-to-date returns could sucker many investors.
The S&P 500 and, for that matter, the global stock market, is having its typical late-summer nap. Volatility is low, and so is attention paid to a variety of news events and economic data releases. But ask many market watchers, and they’ll tell you 2018 has been a good year for the stock market. After all, the S&P 500 is on pace for another 10%+ return year, the economy is roaring, inflation and interest rates are low, and so on and so on…
I don’t know where the market is going next, but I do know this: numbers can be manipulated to suit the needs of the messenger and to take advantage of the viewer. Frankly, turning those bits of mythology and information into knowledge for you is the key purpose of this column. So why do I seem so edgy about what appears on the surface to be another stellar year for investors? Let me count the ways:
- Investors who have made enough money (working, inheritance, investing, etc) to support themselves on what they accumulated should not care what the S&P 500 is doing…but they do, or are told to very subtly by headlines and salespeople. The stock market is a varied lot, and its applicability to you is really based on the outcome you are aiming for, not a basket of 500 large stocks that a committee decided long ago was a good indicator for overall market success.
- The S&P 500 has gone nowhere for 7 months. As the chart shows, since the quick run-up from the start of the year through January 26, the S&P 500 is about break-even. Excluding dividends, it is slightly down.
- Unfortunately, investors have been conditioned to think of every year like a contest. But investing is a continuous pursuit. Taking account of results is essential, but doing so according to the annual calendar is overemphasized. Kind of like an athlete who gets off to a phenomenal start to their season, but then their performance flattens out. If you just look at the year’s stats, you can’t see that their performance was all “front-loaded.”
What does an extended period of nothing in the S&P 500 mean for investors? Maybe, well, nothing. The market is churning, but underneath the headlines lie many individual themes. But as for the “market” that the S&P 500 is considered to track, I am of the opinion that it feels tired and heavy. That’s a chartist’s view and dramatic news can change that. But as I scan hundreds of stocks and market sectors, I see very little to make me think that anything more than marginal new highs are on the horizon as the year progresses.
The most important takeaway from 7 months of nothing is that the S&P 500 should not divert your attention from what you are truly investing for. I rarely encounter someone who says their lifestyle goals will be achieved by investing in the stock market index and then cashing in when they retire. What they want is some combination of capital preservation, income and continued growth. It’s more obvious by the month that bonds don’t do that like they used to, and the popular indexes like the S&P 500 are in the same category. This means that you need to think and act differently as an investor, and part of that is to ignore the calendar and drill down on the purpose of your investing.
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