It was a bit of a wild ride for financial markets and investors in 2018. The year began with promise, quickly turned and concluded with palpable disappointment. For most investors, the S&P 500’s nearly -20% decline between late September and late December will be the most distinct memory of 2018.
By now, the drivers of such negative sentiment have become popular refrain- trade disputes, political policy uncertainty and growth worries. The immediacy of such concern in investing, like in life, can often cause us to lose sight of the bigger picture.
In the chart below, we’ve summarized how that picture has historically been skewed in the investors favor:
Since 1945, the S&P 500 has experienced positive annual returns approximately 78% of the time, while the U.S. economy has expanded, or grown, 85% of the time. This data is overwhelmingly positive and provides a bit of contrast to the parallels some like to make between investing and gambling. It’s hard to fathom a casino being very successful if they were to give bettors these same odds.
Yet, as investors, it feels like we do the opposite and spend 80% of our time worrying about something that may only happen 20% of the time. The work of behavioral economics has helped explain this aspect of an investor’s psyche. In short, research has shown that for investors the pain of losing can be twice as powerful as the joy of gaining. Such asymmetry, at times, can cause investors to make otherwise imprudent decisions.
When performing investment modeling for portfolio construction, we understand not all years will be positive and there will be times when the economy contracts. However, having an investment plan and an understanding of anticipated behavior can help improve the chances of an investor’s long-term investment success.
Generally, our view for the coming year is somewhat measured. For 2019, we believe the U.S. economy will likely continue to expand, although the rate of growth will likely slow. There are a number of items that need to be addressed during the first quarter of 2019, including a resolution to the U.S. government shutdown and a March 1st deadline for a trade deal with China. Over the course of the year, markets will be watching for any policy changes from the Federal Reserve, as well as changes in key economic indicators, like employment. We believe market volatility will likely persist as the current economic expansion inches closer to becoming the longest on record.