With just two weeks left in the year, it looks like the U.S. stock market will experience a well-above average return for 2013. Some find this surprising since there wasn't much optimism about the market's prospects at the beginning of the year. But, as I've pointed out before, the market tends to act to confuse those subscribing to the consensus opinion.
The other thing that perplexes many investors is the pattern under which the stock market delivers an opportunity for investors to generate a profit. Any basic level of investigation reveals that over significant periods of time, equities provide a total return to investors in the high single digit to low double digit range. The common mantra is 10 percent per year average annual return. (Total return is a term used to describe the combination of price appreciation and dividend income.)
Investors tend to desire normalcy. Their perception of normal is 10 percent per year. More is easily accepted, of course, but less causes some level of angst. The chart below illustrates the reality of returns.
The chart groups the S&P 500 Index returns for the last 64 years into 10 percent bands starting with normal in the middle. If 10 percent return is normal, then a return ranging from 5 to 15 percent would be the normal range. The bands then move out to the more positive and more negative ranges from there.
What strikes me about this view of the frequency of returns falling into different ranges is that normal is not really normal. There are far more occurrences of above and below average years than normal years. When we throw in the way above normal and way below normal years, the totals are 50 abnormal years versus only 14 normal years.
I think this begs the question, "What is normal?" or is normal something we should really expect from the financial markets? Certainly for those who start each year seeking normalcy, there's a good chance of disappointment.
The price movements in financial markets are determined by supply and demand for the assets. Put another way, prices are determined by investor expectations, fear and greed. No amount of averaging of years and years of results can be translated into any reasonable expectation for a single year of results. I suggest that we expect the unexpected, and we won’t be disappointed if it just turns out normal.
My next column will be published on New Years Day. I hope you have a great holiday season with family and friends. Merry Christmas!
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.