A signboard displays the TSX close in Toronto on June 4, 2021.Frank Gunn/The Canadian Press
Are stocks out over their skis? With Canadian stocks up nearly 8 per cent year-to-date (including dividends) and U.S. stocks up almost 12 per cent, the bears see an average year’s gains already and are sure little good will come in 2024′s back half. But they’re wrong.
While Canadian stocks have averaged about 9.5 per cent in annualized long-term total returns, echoing U.S. average returns of 10 per cent, both usually deliver far higher or lower returns each year. The averages smooth out the performances of much more volatile extreme years, combining mostly big positives with fewer negatives.
Statistically, average returns aren’t normal – extreme returns are normal. And so the current strength in stock markets is shockingly normal. Let me explain.
Most people equate volatility with negativity. But volatility is simply movement. Rising 1 per cent or falling 1 per cent is similarly volatile. And over the longer term, stock volatility is your friend – hugely so more often than not. Why?
Stocks simply rise far more often than they fall. To glimpse this, forget daily or month-to-month noise. Consider America’s S&P 500 for its longest accurate history, starting in 1925. Since then, stocks gained in fully 73 per cent of all rolling 12-month periods. Ditto in Canada, although the data cover a shorter span: Since the MSCI Canada’s 1969 inception, stocks rose in 74 per cent of rolling 12-month periods.
Yet stocks are rarely graceful en route. To see that, bracket together calendar year returns into these ranges: Greater than 20 per cent, 0 to 20 per cent gains, 0 to minus-20 per cent and minus-20 per cent or uglier.
Since 1925, U.S. stocks gained more than 20 per cent in 37 of 98 years – the most frequent result! Next most frequent? Zero to 20-per-cent gains, totaling 35 times. Returns between 0 per cent and minus-20 per cent followed, at 20 years. Years down more than 20 per cent were the real rarity, at just six times. So, U.S. markets posted huge gains six times more often than big declines.
Looked at another way, U.S. stocks beat their 10-per-cent long-term average in 58 calendar years. They fell – at all – less than half as often, 26 times.
Canada is similar. Since 1969, Canadian stocks rose over 20 per cent in 16 of 54 years – nearly a third of the time. Down years? Only 11 featured 0 to 20-per-cent drops. Just two – 1974 and 2008 – featured bigger declines. Historically, you are more likely to celebrate above-average, even huge, years than encounter down years.
That makes 2024′s big start look common, not curious.
The fact is that average returns are rare. For the S&P 500, gains of between 5 per cent and 15 per cent occurred in just 17 per cent of those years. Canada’s stocks landed within that range in Canadian dollars a third of all years since 1969. But returns greater than 15 per cent occurred even more often. Meanwhile, returns of 0 to 10 per cent occurred in just 10 per cent of all years for the S&P 500 and 24 per cent for Canadian stocks.
Consider just the past five years. Many fixated on 2022′s market decline, calling the year “volatile.” But what of all the great volatility during 2019, when the S&P 500 soared 31.5 per cent, or 2021′s 28.7-per-cent surge. Or 2023′s 26.3 per cent. All were extreme.
Ironically, 2020 was the closest to “average” year in that stretch: Despite COVID’s lockdown-driven, hyper-fast local bear markets, U.S. stocks rose 18.4 per cent (while, yes, Canada’s lagged at merely 4.3 per cent because of the oversized weights of financials and energy dragging it down). But I hesitate to call anything about 2020 “average” or “normal.”
Intuitively, a crucial difference is whether you’re in a bull or bear market. But few ever stop to think “I’m in a bull market so returns should average much, much higher than total average long-term returns.” Big returns just aren’t the rarity “too far, too fast” bears claim. In bull markets, they are what is “normal”.
To see that, consider the long-term annual average returns of roughly 10 per cent and 9.5 per cent for U.S. and Canadian stocks, respectively, include bear markets. The bull markets alone, regardless of whether in America, Canada or the totality of the developed world, average over 20 per cent per year. Hence, seemingly “extreme” positives within bull markets underpin the “average” returns bears cite.
I am not suggesting 2024 will feature booming returns exceeding 20 per cent – my December forecast showed you that. But it wouldn’t shock me! And now, it shouldn’t shock you. Regardless, when you realize that robust gains aren’t abnormal, you realize “too far, too fast” fears are faulty.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments.
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