Market Surprise…

In January, we received an extensive amount of historical stock market data. One particular data point caught my attention and prompted a deeper dive.

Over the past 50 years, the stock market has posted positive returns in 80% of calendar years. Early in my career, the conventional wisdom held that the market was positive 75% of the time. That may not seem like a big difference, but it shifts the odds from a down year every fourth year to every fifth year. I went back to confirm the data: over the past 50 years, the market had 10 down years — right in line with the 80% figure.

Then I looked at the 139 years prior to that 50-year window. During that longer span, the market posted negative returns in roughly 33% of years — about every third year. So, over time, we’ve seen a meaningful improvement in annual market performance.

What about returns?

When breaking the past 150 years into three 50-year segments, each one shows higher inflation-adjusted returns than the last. Even more impressively, the most recent 30-, 20-, 10-, and 5-year periods have outperformed the most recent 50-year average. The trend is clear — and it’s encouraging.

Why is this happening?

Several important developments in the financial system have contributed to this improvement:

• Deregulation lowered — and eventually eliminated — trading commissions
• SEC oversight and better accounting standards reduced fraud and criminality
• Financial reporting standards were significantly enhanced
• Corporate management improved as compensation structures aligned with performance
• Innovative investment products were introduced
• Fee-based Registered Investment Advisors began to dominate over commission-based brokers
• High-quality research became more accessible and affordable
• Computers transformed both corporate management and investment processes
• Mergers reduced the number of public companies, creating greater demand for fewer opportunities

Together, these factors brought more investors into the market and increased access to better investment vehicles. It’s a good time to be an investor.

What about the Federal Reserve raising interest rates?

This scenario has occurred 12 times in the past 68 years. The average return for the S&P 500 during those periods was 9%, and the index rose in 11 of those 12 instances. That’s not surprising — rate hikes usually happen when the economy is strong, as is the case today.

Katz Family Financial