The bull market can’t possibly last another 10 years, right?
Don’t bet against it, according to Nick Maggiulli, who examined what he calls the “investor’s fallacy” in a post on his “Of Dollars and Data” blog.
“With the stellar performance in U.S. markets over the previous decade, it feels like a correction is warranted,” the Ritholtz Wealth Management analyst explained. “However, if you examine the data you will realize that this thinking is just as flawed as the person expecting a tails after seeing five heads in a row.”
He’s referring, of course, to the gambler’s fallacy, which is the false belief that just because a particular event has happened more frequently than usual it is less likely to happen in the future. The coin flip is the oft-used example: After five heads in a row, it sure feels like a tails is coming.
While markets obviously are not an independent process, like the flip, historical returns sure make it feel that way. In fact, as Maggiulli shows in this animated graphic, there is little to no relationship between the prior 10-year returns on the S&P 500 SPX, +0.49% and growth over the decade.
He then singled out the 10-year returns and future 10-year growth:
The trends aren’t easy to spot. So what does it mean for those trying to hatch a plan on how to tackle the market in the coming decade?
Well, over the previous 10 years, the S&P delivered a compound rate of 13.4%. In the past, when the markets turned in that kind of double-digit advance, the following 10 years grew somewhere between 1.1x and 5x, according to the data.
There’s not a lot to go on with that, trend-wise.
“I have no idea what U.S. markets will return over the next 10 years, and history seems to suggest the same thing,” he said, noting, however, the metrics change over a 20-year period, when strong markets over tend to turn sour the following decade, and vice versa. If that trend holds up, there’s good news for investors:
Using those numbers, the S&P compounded at a rate of about 6.3% from 2000 through 2019, which means that, historically, stocks have grown between 4x and 5.5x over the next 10 years. Not bad.
But this is where it gets really interesting.
“Of course, history doesn’t have to repeat itself in any meaningful way for 2020 and beyond, but if the S&P 500 ‘only’ doubled over the next decade, here is where that point would lie on this plot,” Maggiulli wrote, pointing to this chart:
“Think about how insane this would be relative to history,” he said. “If you are expecting anything less than a doubling of the S&P 500 by 2030, then you are suggesting that the red star above will be even lower on the y-axis than where I already placed it. If this were to occur, it would be unlike anything we have ever seen before.”
Taking it a step further, if history accurately predicts the outcome using these numbers as a guide, the S&P would quadruple by 2030, Maggiulli found.
“This statement seems crazy right now, but that’s what has happened historically,” he said. “I understand that there is no law forcing U.S. markets to follow this trend indefinitely. However, if you are forecasting an awful coming decade for U.S. stocks, I have some bad news for you — the evidence is heavily against you.”
For what it’s worth, this decade is most definitely off to a bullish start, with the Dow DJIA, +0.60% closing above 29,000 on Wednesday for the first time and extending gains with a triple-digit jump in Thursday’s session.