about 3 years ago • 3 mins
For all of last year’s turmoil, including the fastest-ever onset of a “bear market” and the fastest subsequent recovery in 40 years, US stocks ended up scoring a surprisingly average performance across 2020 overall. History suggests, however, that 2021’s returns are likely to be much more remarkable.
As coronavirus spread around the world last spring and share prices plummeted, 2020 looked odds-on to go down as a dire year for stock investors. Yet thanks in large part to swift interventions from central banks and governments, the US Dow Jones Industrial Average index actually ended the year 7.2% higher than where it began – almost bang in line with its 7.4% average annual return since 1900.
When considering what the coming year will bring for stock markets, it may strike you as sensible to assume that returns will, once again, come in more or less around that 7.4% mark. And that certainly chimes with the professional consensus. According to data giant Bloomberg, the average call among 17 major investment banks is that US stocks will indeed end 2021 a familiar 7.4% higher than they were on New Year’s Day – although there’s a fairly wide spread between the most optimistic projections (JPMorgan Chase) and the least (Citigroup and Bank of America).
So far, so unremarkable: the average Wall Street investment strategist predicts a high-single-digit stock market return basically every year. (Although they were more pessimistic than usual this time last year, forecasting barely a 1% gain in 2020).
Stocks, however, are an inherently volatile asset class, with prices that swing sharply both up and down. And an influential money manager at investment firm Robeco pointed out this week, this means that the US market’s annual return has actually fallen within that “average” 5-10% gain range just 11 times over the past 121 years.
As the events of 2020 proved, making any accurate prediction with a 12-month horizon is hard. But the US stock market’s checkered history, with its huge deviations in annual price swings, suggests you can say at least one thing with some certainty: 2021’s returns are unlikely to be ordinary. The vast majority of the time, market movements end up lying far off the 7.4% mean.
So if you want to make a name for yourself as an investment guru and/or impress your friends, why not call for a 20%-plus surge in stocks this year – something that’s occurred three times as often than a 5-10% rise? Or if you’re less sanguine, how about predicting an over 20% drop? You’d have been proved correct 11 out of the past 121 years; in other words, on the same number of occasions as there were “average” returns.
The Robeco asset manager, for his part, reckons US stocks will climb at least 15% in 2021 – as has happened roughly a third of the time since 1900. And rival firm LPL Financial similarly thinks that 2020’s strong closing weeks bode well for this year.
Whatever happens, it’s worth remembering that a gain of over 20% in US stocks – or, indeed, a drop in their value – is much more likely than a steady single-digit advance.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.