July 2020
Many market economists predict future market returns to be less than we have seen over the past for various reasons. Are they right? How can they know? Do any of us know? Should we have hope?
The answer is complicated because the stocks that make up the S&P 500 changes more than a little. A committee selects each of the index's 500 corporations based on their liquidity, size, and industry. The committee rebalances the index quarterly, in March, June, September, and December. The decision on change is made based on various factors. In short, the changes to the lineup are determined by adding rising companies whose market values make them amongst the largest on the NYSE or Nasdaq and the companies removed are the ones that are falling in value.
Quick test, does that sound positive or negative for future returns? Obviously, rising companies replacing falling companies should help to increase future value of the index but there is no guarantee.
Goldman Sachs strategists led by David Kostin said the following recently, “We estimate the S&P 500 will deliver an average annualized total return of 6% during the next 10 years,” Kostin said. “The S&P 500 index changes over time,” Kostin wrote. “Since 1980, more than 35% of S&P 500 constituents have turned over during the average 10-year period.”
A few examples of current constituents that were not in the S&P 500 index in 2012: Facebook (FB, entered index in Dec-2013), PayPal (PYPL, Jul-2015), Broadcom (AVGO, May-2014), and ServiceNow (NOW, Nov-2019).
If you bought 100 shares of Facebook’s stock on Dec 1, 2013 for $47 per share and sold them on July 27, 2020 (6.5 years later) at $233, then your return would be about $18,600 or almost 400% which is about 60% per year (assumes no commissions, no dividends, and no transaction costs). If you bought 100 shares of PayPal’s stock price at $38 on July 6, 2015 and sold them on July 27, 2020 (about 5 years later) for $176 your return would be about $13,800 or about 360% which is about 72% per year (assumes no commissions, no dividends and no transaction expenses). If you bought 100 shares of Broadcom’s stock at $63 on May 1, 2014 and sold them on July 27, 2020 (74 months later) for $310 the returns would be $24,700 or 392% which is about 63% per year (assumes no commissions, not dividends and no transaction costs). Lastly if you bought 100 shares of Service Now’s stock at $249 on Nov 1, 2019 and sold them on July 27,2020 for $435 (9 months later) the return would be about $18,600 or roughly 75% which is about 100% annualized (assuming no commissions, no dividends and no transaction costs). These numbers obviously far outpace the S&P 500 and can only help improve upon previous estimates. For illustrative purposes, the S&P 500 has averaged about 14% per year over the past 10 years (dividends included in the performance calculations) and this followed a major market sell off in 2008-2009. Please note that different time periods will return different results which could be substantially less than 14%.
As you can see from the chart below, investing based on the growth of the S&P 500 over time seems to be somewhat of obvious choice but guessing what those returns will be in the future seems like a dicey endeavor. Probably the only people less able to predict the future are weather people.
Dec. 31, 2019 _____________________________31.49%
Dec. 31, 2018 _____________________________ -4.38%
Dec. 31, 2017 _____________________________ 21.83%
Dec. 31, 2016 _____________________________ 11.96%
Dec. 31, 2015 _____________________________ 1.38%
Dec. 31, 2014 _____________________________ 13.69%
Dec. 31, 2013 _____________________________ 32.39%
Dec. 31, 2012 _____________________________ 16.00%
Dec. 31, 2011 ______________________________ 2.11%
Dec. 31, 2010 _____________________________ 15.06%
1From www.yahooFinance.com S&P 500 annual returns. The S&P 500 is an unmanaged index that cannot be directly invested into. Past performance does not guarantee future results.
This article is for informational purposes only. It does not constitute investment advice and is not an endorsement or recommendation for any particular security or investment strategy.
Investing involves risk and the potential to lose principal.
Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and cannot be guaranteed. Data contained herein is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.