Bullish investors have taken over the stock market, and even with lingering concerns about the COVID-19 pandemic, they aren't letting that uncertainty get in the way of big gains. The S&P 500 and Nasdaq Composite (NASDAQINDEX:^COMP) were back at record highs on Friday, and even the Dow Jones Industrial Average (DJINDICES:^DJI) is starting to show signs of strength.
Today's stock market
|
Index |
Percentage Change |
Point Change |
|---|---|---|
|
Dow |
+0.57% |
+162 |
|
S&P 500 |
+0.67% |
+23 |
|
Nasdaq Composite |
+0.60% |
+70 |
Data source: Yahoo! Finance.
With today's gains, markets have all passed a big milestone. Coming into 2020, few might have been excited about the idea that major benchmarks would merely be at break-even levels. Yet after the big drop in February and March, to have all three of the most closely watched indexes in positive territory for the year is definitely something to celebrate.
How markets are faring for the year
To be clear, the gains for 2020 are far from equal across the board. It took today's advance in the Dow to bring the average's return for the year so far to a whopping 0.4%. Add in dividends, and you'll end up somewhere between 1% and 2% in total return for 2020 year to date.
The broader-based S&P 500 has done better. With today's gains, it's up about 8.6%, and total returns are likely approaching the 10% mark.
Those who've followed the stock markets all along know that the Nasdaq Composite is easily leading the pack. It's now up more than 30% over the past eight months.
Getting a broader context
It's reasonable for investors to worry that the markets are getting ahead of themselves. However, when you incorporate a longer-term look, the gains don't look quite as crazy.
For instance, over the past five years, the Nasdaq is up 143%, while the S&P and Dow are up 76% and 72%, respectively. That works out to roughly 19% average annual returns for the Nasdaq, and yearly returns of 11% to 12% on average for the Dow and S&P.
Extend the time period to roughly 10 years, and the story stays largely the same. The Nasdaq's 443% advance works out to roughly 18% per year. The S&P's gain of 230% equates to a 13% average annual return, while the Dow's 182% rise clocks in at 11% per year on average.
What's next?
It's absolutely certain that the stock market will crash in the future. As always, what we don't know is when, and there's no good way to tell.
Image source: Getty Images.
This isn't the first time the market has seen gains that seemed unsustainable. During the 1990s, the tech boom went on far longer than anyone expected. Sure, the crash in 2000 through 2002 was dramatic -- but those who got out of the market in the mid-1990s after five years of strong gains missed five more years of advances -- and likely didn't time getting back into stocks during the bear market correctly, either.
Similarly, many didn't expect the bull market of the 2010s to last as long as it did. Those who sold in late 2015, for instance, were worse off than those who stayed invested in the late 2010s and then sold out at the absolute worst level in March 2020.
As scary as it is to invest in stocks at record highs, there's no reliable way to predict how to avoid downturns. Only by accepting the risk of losses can you hope to match the big gains that long-term investors have enjoyed.
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August 29, 2020 at 05:17AM
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