S&P 500 Index
Behavior From 2015 - 2019
Graph 1 -- S&P 500 Index for 2019 as of 11/15/2019 Closed at 3,120.46
There is a
popular saying … “Economics is Easy, Economists
Make it Difficult”. In a similar vein … “Investing
is Simple, Investors Make it Complicated”. To quite an extent investing in
any market is a leap of faith, given the obstacles in terms of information and
time. But some human beings are adventurous thus the investing markets always
attract a crowd.
For any
serious market participant the movement of well-known benchmarks like the Dow
Jones Industrial Average or the Standards & Poor 500 Index is critical. In
this piece we examine the behavior of the S&P 500 Index for almost 5 years.
We prefer the S&P 500 Index since it is a much broader based index as
compared to the Dow Jones Industrial Average.
The US Stock
Markets ended on November 15, 2019 at all-time new highs. What a difference the year 2019 has been all
round. Beginning of the year the Market
Bears were on the prowl and all the Cassandras of doom and gloom had their
moment in the limelight with grim forecasts of further disasters. The fact that
performance wise December 2018 was the worst December since 1931 was a glaring
fact which could not be wished away even by the optimists.
Having seen
several market cycles since 1989, we have been steeled to face the curve balls
the market regularly throws at its participants. There is no shortage of
opinions of how to navigate the market turbulence; some emphasize aggressive
styles and some prefer defensive approaches. The optimal strategy is to be
flexible and approach the whole problem as one of managing risks to Capital
Preservation and Capital Appreciation.
Hence when
Market conditions demand a defensive outlook, it behooves us to pare down
relatively risky positions. Conversely when market conditions improve we have
to take a relatively aggressive stance. That is the essence of tactical
investing. It is very similar to the challenges a good batsman faces in a Test
Cricket situation, only a good combination of offence and defense will ensure a
good performance especially over several sessions and days.
Having that
flexible mindset we reduced our risky equity positions during the months of
November 2018 and December 2018. Similarly, when risks abated we stepped back
into an aggressive stance in early February of 2019. This stepping out of risky
positions in 2018 was essentially an insurance against a portfolio meltdown
which can have almost catastrophic consequences.
Overall the
Markets have done well so far for 2019 and more relevant so have our own
portfolios. For the record the
S&P-500 Index has gone up by 24.5% year to date.
Since we
mentioned last year’s December 2018 debacle it would be valid to see how the
markets looked at the end of 2018. The following Graph-2 gives a good visual
display.
Graph
2 -- S&P 500 Index for 2018 as of 12/28/2018 Closed at 2,485.74
January 2018
saw a strong start in the markets which was too good to last, and after a brief
sell off the markets recovered over the next 8 months. One quick look at the above graph makes it
clear that there was a precipitous sell-off in the markets during the fourth
quarter of 2018. It clearly indicated fear among participants given the rate at
which the selling took place. The gains accumulated during the first three
quarters vanished in the frantic hurry to reduce equity risk. After over ten
years the S&P-500 Index had a
loss of 6.2% for the year 2018.
The above
price action clearly indicated the emptiness of the frequently used phrase, “As January goes so does the Year”,
implying a positive January ensures a positive year. If only investing was that
simple, one has to always discern between simple and simplistic.
It will also
be worthwhile to note that the volatility of US Stock market rose sharply
during the year 2018 and reached 2.53% as compared to 2017 which was benign at
0.77%. The measure of volatility which I use is the standard deviation of
weekly returns over a given year.
If 2019 is
the year of recovery and 2018 was the year of volatility and negative returns,
2017 was a spectacular year of unconstrained growth in the US Stock Market. It
was the “Trump Boom” caused by business friendly legislation. The following Graph-3
is reflective of that unique occurrence.
Graph
3 -- S&P 500 Index for 2017 as of 12/29/2017 Closed at 2,673.61
Sometimes
investors get lucky with steadily rising markets with hardly a scare, 2017 was
one such rare year. A cursory glance at the above graph confirms the fact that
US Stock Markets were extremely buoyant for the entire year 2017. If only all
years were like this, reminds me of the saying if wishes were horses,
donkeys would ride them.
The S&P 500 Index grew over 19.7%
for the year 2017,
with consistent growth and hardly facing a correction. It was a period of high
returns and low volatility of 0.77%. This was in contrast to the previous year
of 2016.
Graph-4
visually indicates the challenging year of 2016.
Graph
4 -- S&P 500 Index for 2016 as of 12/30/2016 Closed at 2,238.83
The year
2016 was overall very interesting but it began negatively with sharp selling
during the month of January. It was followed by a period of recovery and
consolidation till the November Presidential election. Following the clear
verdict the markets got the next leg up and finished quite strongly.
2016 was a
very challenging year from an investing standpoint with markets lacking clear
direction, at least during the first half. Further the Brexit imbroglio was an
exogenous event adding to political uncertainties. Who said investing was easy?
The markets deliver a judgment mercilessly every day which needs a certain
mindset rooted in robust investing principles.
The S&P 500 Index grew by 9.5%
for the year 2016,
with some level of volatility during the first quarter. Overall it was a case
of moderate returns and moderate volatility of 1.72%. Again this was in
contrast to the previous year of 2015.
Graph
5 -- S&P 500 Index for 2015 as of 12/31/2015 Closed at 2,043.94
Edmund Burke
once said nothing is so fatal to religion as indifference, similarly
investors abhor sideways markets with hardly anything to show for at the end of
year.
The year
2015 was unique with the bulls and bears battling it out throughout the year.
Greed and fear ruled by turn and the net result was higher volatility and low
returns.
The S&P 500 Index lost marginally by 0.7% for the year 2015, and not surprisingly there was increased volatility to the tune of 1.90% which was higher than the previous three years.
Summary of S&P 500 Index From
2015 to 2019
Year
|
S&P 500
|
Annual Return%
|
Volatility
|
11/15/2019
|
3120.46
|
24.5%
|
2.17%
|
2018
|
2506.85
|
-6.2%
|
2.53%
|
2017
|
2673.61
|
19.4%
|
0.77%
|
2016
|
2238.83
|
9.5%
|
1.72%
|
2015
|
2043.94
|
-0.7%
|
1.90%
|
In summary the S&P 500 Index grew by 51.6%
during the time period starting from January 01 2015 to November 15 2019.
Effectively
the S&P 500 grew at a compounded
rate of 8.9% annually each year for almost the past 5 years which is par
with historical averages.
But as the
oft repeated saying goes, past
performance is no indication of future results. “Buyer Beware” is true
universally for all investors. Eternal vigilance over the markets is the price
of financial freedoms.
