The Mysterious 10% Return
by Brian Durno, CFA – January 21, 2010
It turns out that 2009 was an extraordinary year. I mean, statistically. We are not ones to spend time making forecasts or defending forecasts gone wrong, so we thought it might be interesting to shed some light on historical stock market performance. We’ll concentrate on Canada’s stock market represented by the S&P/TSX Composite Index (TSX).
Since 1970, the compounded average annual rate of return for the TSX in the period ended December 31, 2009 is +9.7%, we’ll call it +10% for simplicity. You may be surprised to know that the number of times the market has actually delivered this +10% return in the last 40 years is only once. The range of returns have been between -33% and +44%. More than 2/3’s of the time the stock market’s return is somewhere between -6% and +29%. Now you understand why market forecasters usually get paid based on factors other than the accuracy of their forecasts. Predicting annual performance of the stock market is a mugs game however, 24 hour business television would be pretty dull without someone talking about such things.
The last 2 years have been anything but ordinary. 2008 delivered -33% to equity investors in Canada. This was followed by 2009, delivering a staggering +35%. For those keeping score at home, the TSX is still about 22% below its peak in June of 2008. The funny thing about a +35% rate of return is that it causes great optimism in investors. Is there any historical basis for this optimism?
The record shows that since 1970, there have been 5 such instances of TSX performance greater than +30% (2009 was the 6th time this has happened). Naturally, the next question is what happened in the year following the big +30% year? The average return following a year with +30% was about +5%. Unfortunately, the variability contained within this average is quite substantial. The range of returns was -10% to +30%. Three of the five years following a +30% gain had a negative annual rate of return.
The purpose of this analysis is not to make a market forecast as this is not our business. We merely present the facts of the historical record to assist investors in framing their expectations for 2010.
Brian Durno, CFA
JDM Investment Partners
The Investment Partners Fund
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