Risks and Returns: Index Performance Expectations in 2020

Given such a strong run for equities in 2019, one might expect markets to cool off a bit in the new year; however, the first month-and-a-half has not seen such a slowdown. Further, looking back at historical market returns may give us a different perspective about what we should expect moving forward. Since 1928 when the index was created, there have been 24 years that produced a 20%+ return for the S&P 500 (not counting 2019). As the table below shows, there have been only eight occasions when the following year produced a negative annual return, with the average return for the following year being 6.58%. If we look only at the last 40 years (since 1980), the average return in a year following a 20%+ gain jumps to 12.12%, with only two negative years and nine positive years. All of this to say that a return of 20% or more for the market is not necessarily a bad thing for the market going forward.

 

The returns above are price returns and do not include dividends or all potential transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by the possibility of loss.

Another “fear” common amongst investors is the looming 2020 Presidential Election. As the graph below shows, on average, election years actually lead to slightly enhanced returns, for both the Dow Jones Industrial Average and the S&P 500 compared to non-election years as the DJIA and SPX have seen average returns of 7.80% and 7.11% during election years. The Nasdaq Composite, interestingly enough, actually has produced higher returns in non-election years; however, still shows a return in line with the DJIA and SPX in election years.

Lastly, with fears regarding the coronavirus in China making headlines, we wanted to take a look at the Chinese equity market through a technical lens. Below is a chart of the iShares MSCI China ETF [MCHI]. This ETF owns a broad basket of Chinese equities and, despite the fears and headlines surrounding China, the chart of MCHI is currently trading in an overall positive trend with initial support at $60. International equities, in general, continue to lag US markets; however, the technical weight of the evidence for Chinese equities remains positive at this time as investors continue to digest the potential impact the coronavirus could have on markets around the world. 

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Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. 

Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value.

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Nasdaq Dorsey Wright is a registered investment advisory firm with more than 30 years of expertise is technical analysis, specifically focusing on the steadfast relationship between supply and demand in the markets. Our research and tools help our clients see through the day-to-day clutter of market movements while providing a clear understanding of where market strength lies at all times.

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