Humans have long relied on standards and averages to help them gauge the performance of everything from intelligence to athletics to the economy. So far, in 2014, UK and International stock markets have been grinding along without making much progress in either direction and that has left many people looking for guidance about what they can expect in the future.
Last week, a writer at Barron’s enlisted Jeremy Siegel, a finance professor at Wharton, to help explore the question by updating data used in a 2009 article. That piece had looked at the performance of the U.S. stock market over 142 years and found “below-average returns over five- and 10-year periods generally are followed by above-average returns in the next five and 10 years.” In the new article, Siegel and his associates looked at rolling five-, 10-, 20-, and 30-year return periods through the end of 2013 and found:
“For the 60 months ended in April, the compounded annual real return was nearly 17 percent, well above the median 7.17 percent for all five-year periods. (Taxes and investment fees aren’t included.) That suggests the next five years could run below the average.
While that might temper bullishness, in the 120-month period ended April, the compounded annual real return was just 5.58 percent, a full percentage point below the 6.64 percent median 10-year annual return for all the periods measured – again, since 1871.”
Despite the mixed signals provided by long-term averages, Siegel told Barron’s “the odds-on bet” is the Dow Jones Industrial Average will hit 18,000 (currently c.16,500) by the end of the year (although there may be corrections along the way). His expectations are interest rates will remain lower than has been suggested and earnings will experience strong growth.
It’s a good idea to take the esteemed professor’s thoughts with a grain of salt. An eight-year study of market pundits found they were right about 47 percent of the time.