Don’t Pull the Rip Cord

On Monday, the WSJ had an article discussing asset class performance in 2018. The chart below is from the article showing a record number of asset classes have posted negative total returns year-to-date (YTD) through mid-November.

One might initially think the sky is falling upon seeing this chart and reading the article. An impulsive reaction would be to start thinking about or actually selling out of positions and asset classes. Whether the percentage of asset classes posting negative returns for 2018 remains at these levels won’t be known until the end of the year. However, I’m not sure it’s that important.

We all know 2018 could be characterized as the return of volatility. Monetary policy has been tightening, the global economy’s rate of growth has been slowing, the rate of earnings growth is expected to slow in 2019 and other geopolitical tensions probably have contributed to the increase in volatility. Again, I’m not sure how much it matters. It’s nice that markets appear to be returning to some sense of “normalcy” but it also can result in more anxiety and sleepless nights for those that pay attention to daily market moves.

As of mid-November, 90% of asset classes had negative returns YTD, which is the most on record since 1901. Drawing a line in the sand, I counted how many years since 1901 where at least 60% of asset classes generated a negative annual performance in any given year. I counted eight (1919, 1920, 1923, 1931, 1949, 1981, 2008, 2015). In the subsequent years, only two (1919, 1932) resulted in negative total returns on the S&P 500. The average total return on the S&P 500 in subsequent years was 13.3% with a median total return of 18.4%. Down years averaged a total return of -13.4% while up years averaged a total return of 22.2%

Who knows what’s going to happen next year as every period of history has its own set of nuances. However if we play the odds, using history as a guide (75% of the time the total returns have been positive after a year in which at least 60% of asset classes generated negative total returns), it would appear 2019 has a relatively high probability of being a good year for stocks. I’m not making any predictions but I don’t think it makes much sense to be hasty in pushing the eject button after a trying year like 2018.