As of the end of November, the S&P 500 index had returned +27.6% for the year – a phenomenal year by any standard. For the last three years the benchmark has returned +14.5% annually which is well above the long term average of +10.0%. But as we have noted, investors have focused heavily on predicting the next downturn, constantly echoing that these results can’t possibly continue.
In our world we hear about “reversion to the mean” a lot. It simply means that investment results will return to the long term average over time. It might be used to explain why returns may not be so rosy in the future. Think about it. It’s easy to look at the last ten years and say that we are “due” for a pull back or that returns can’t possibly maintain this pace. But is that true? The S&P 500 had an incredible run during the 1980’s returning +17% per year for the decade. What happened next? It ripped through the 90’s and returned +18% per year…an even higher result.
We aren’t predicting the next decade will match the 90’s but stranger things have happened. A 10 year bull market is not reason alone for returns to subside. What if they continue? What if it’s only the fifth inning?
