The stock market rarely produces average returns
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Tuesday, October 11, 2022
Wall Street Companies Have Started Publishing 2023 Forecast for S&P 500.
Targets announced by the top seven equity strategists range from 3,800 to 4,200, implying a return of 4% to 15% from current levels.
We will only know how accurate these calls are in hindsight. However, we do know that last year’s 2022 forecasts have proven inaccurate so far.
As of December 5, 2021, 14 strategists followed by Tker.co has a S&P 500 end-2022 target between 4,400 and 5,300. At the time, forecast returns for one year ranged from -3% to +17%.
Have so many things to say about making these short-term forecasts.
For one thing, they usually gravitate around the average expectation for around 8% to 10% returns.
And why not? Historically, the average annual return on the S&P has been around 8% to 10%.
Unfortunately, 8% to 10% returns are not as common as you might think.
Check out the two charts published last week from A wealth of common sense. They chart the annual returns of the S&P 500 since 1977.
As you can see, returns of 8% to 10% are not uncommon at all. This is Important facts about the stock market.
The 8% to 10% average comes from outstanding returns over many years, weak or negative returns over many years, and average returns over a few years.
In this regard, I often think about this quote that legendary investor Peter Lynch made when October 7, 1994 speech:
Some events will come out of the left field, and the market will go down, or the market will go up. Volatility will happen. The market will continue to have these ups and downs… The company’s underlying profit has grown by about 8% a year historically. So the company’s profits double about every nine years. The stock market has to double about every nine years… Next 500 points, next 600 points – I don’t know which way they will go. So the market will double in the next eight or nine years. They will double again in eight or nine years after that. Because profits go up 8% a year, and the stock goes up. Thats all to have it.
When he said “market,” Lynch was referring to the Dow Jones Industrial Average, which closed at 3,797 on the day he spoke. If you compound that number with a 28-year growth rate of 8%, which is what you get today, you get 32,757. The Dow closed Monday at 29,203, a pretty high close.
If you did this exercise with the S&P 500, which closed at 455 on the day Lynch spoke, you would get 3,925 assuming a compound annual growth rate of 8%. The S&P closed Monday at 3,612.
Again, if you look at the charts above, you won’t see years of 8% returns. But over time, you get an average return of almost 8%.
While your long-term investment plan may assume average returns on the stock market, it certainly shouldn’t assume average annual returns.
What to watch today
Economy
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6 a.m. ET: NFIB Small Business OptimismSeptember (91.6 expected, 91.8 last month)
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10/11-10/18: Monthly budget reportSeptember (- $39.2 billion expected, – $64.9 billion prior)
Income
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