Much noise has been made around recent lows plumbed by volatility measures in 2018. It’s important to start any conversation on markets by seeing what has actually happened, so we’re grounding ourselves in reality. What does the market look like in 2019? Watch the webinar to hear insights from Shane Tenny, CFP® Professional about how markets affect you and what you can expect in 2019.
Transcript:
SHANE TENNY: Well, good afternoon, everyone. I want to thank you for joining us for this afternoon's conference call on looking back at 2018 and looking forward to 2019. My name is Shane Tenny. I'm one of the partners here at Spaugh Dameron Tenny. And also appreciate those of you that put up with some of the technical difficulties we had getting the call launched. But we're here now and looking forward to getting started to share with you some thoughts that we've had in conjunction with our friends over at BlackRock and their research team. And appreciate you taking the time to dial in with us.
Couple of logistical things. First, we are recording the call. And so if you need to drop off partway through, we'll be sending out the recording link later so that you can finish listening or you're welcome to forward this on to friends or family or anyone else who might be interested in that. Also, we've learned from past calls that some of the information that we'll talk about here will generate questions in your mind, many of which are often personal to your own situation. And so we do mute all the lines here, but we welcome your questions afterward.
Feel free to email or call in, and any of the folks on our team would be happy to talk with you about the information we discuss here today and in particular, how it might impact your situation and your plan. And then finally, before we get rolling here today, I'd be remiss if I didn't start this webinar, especially here at the beginning of 2018, with a sincere thank you.
We recognize that there are no shortage of places you can turn for financial information and in particular, financial advice. And we genuinely thank you for the trust and confidence that you've placed in Spaugh Dameron Tenny, in our team, and our advisors to help guide you and your family toward your goals and the priorities that are important to you. And so I hope you hear that above all else through the discussion today. Thanks. Thanks from us to you for your faith in us. And let us be of help to you.
Now, with that said, let me dive in and give you an idea of how we want to structure the information today as we go through the presentation. We basically kind of group things together in a look at the markets, where we've been, and where we're going. I want to spend some time talking about not just what's going on, but how we respond to it, greed and fear in our emotions. And then finally, we're close with some thoughts to maybe give you some perspective as you think about what to do with the information we talk about.
Certainly, as we look back at last year, 2018, kind of comes to mind based on when you were paying attention to the news from the headlines in February about the worst single-day point decline in the Dow's history through the S&P's all-time highs and the longest bull record or bull market news that was coming through the early part of the fall. And of course, all the news about tariffs and trade tensions between the U.S. and China. And then certainly the volatility through the fourth quarter, it can be hard to decipher what's important and what's not. And certainly the headlines aren't the good basis on which to create a strategy or make decisions. We want to have the right perspective, and sometimes it can be hard to tell what's happening simply by looking at the news.
In fact, last year presents itself as a good picture in contrast to 2017. And what we see is really a tale of two years where 2017 was marked by rising equity values across U.S. and international stocks. Even the bond market posting some positive single-digit returns. The entire floor came out by the end of 2018. We saw a marked downturn in U.S. stocks by the beginning of October. We saw U.S. stocks end down more than 5% by the end of the year. And international stocks with which had been the swoon of the markets through 2017, closed down.
Here you can see 13-14% depending on whether you're looking at developed or emerging markets. And then even bonds barely eked out a positive digit with a 1/10 of a return posting for last year. And so a big, big contrast there. And so it's natural and it's normal if you come into 2019 and said, oh my gosh, what just happened? The question, of course, is, is this normal? Is this time different? Is something important about to take place? What do we do?
And so one of my favorite slides in this entire presentation is this one helping to put the volatility that we've been recently experiencing in context. So volatility, of course, is the ups and downs of the market, which we intellectually know are normal. When we talk about risk in general, we're looking at volatility of more than 2% up or more than 2% down. And so as we look at 2018. And the chart at the bottom, you can see we ended the year with 20 days where the market was either up or down more than 2%. And I think as it shakes out, I think 12 of those were down days and I think eight were up days, though that's not, I haven't documented out the footnotes here, but I think that's close to right.
You can see that the average number of trading days over the last nearly two decades where the market's been up or down more than 2% is 11. So last year was slightly higher than that, but it was way higher than what we've been emotionally accustomed to over the last six years. In 2017, you can see we had zero days with that level of volatility, 2016 and '15 and '14 and '13, and '12 were all below average in terms of the amount of market volatility. And that's coming off a couple of years of extreme volatility through 2009. Which came after a period of relative quiet through 2004, '05, '06, and '07.
In fact, you can see there was a period of nearly two calendar years where there wasn't one day with the market trading over 2%. And so while last year felt abnormal in terms of the headlines that we were reading, it really wasn't that abnormal in terms of the historical trends that we've seen over the last two decades. It's important to always keep that in perspective. You've heard me say that on calls in the past, and I'll say it again. Decisions ought to be made on historical fact, not based on headline noise. So we know we're entering 2019 with renewed normal volatility, but where does that leave us? Again, comparing the last two years, we see 2017 having really positive trends across the board, whether globally, inflation-wise, policy-wise, or investor sentiment.
As we end 2018 and launch into January, here we see the news being relatively positive around the world in terms of global strength. Certainly the growth is slowing a bit, but things are still strong and positive inflation is actually pretty manageable. Though interest rates in the U.S. are rising, it's not a major concern and it's important to remember that rising interest rates are because the Fed sees the economy as being strong.
Government policy is probably the area of biggest concern to me personally, not because the Fed is going to be raising rates perhaps one or two more times this year. I think this chart of four times may be a bit pessimistic, but the current standoff and the stalemate in Washington definitely has some near-term concern. And so it's unclear exactly where things will head, but certainly uncertainty is there. But all is not lost. There's still a lot of good news out there domestically.
We still have the lowest corporate tax rates that we've had in nearly 30 years. Earnings reports are still positive from a vast majority of the S&P 500 stocks. Government stimulus is still there with low personal income tax rates based on the tax cuts passed at the end of 2017 and even around the world. We see earnings still strong in emerging markets. We see the price of good quality companies around the world at very good values. Technology is driving growth. And so with caution, there are still a lot of opportunities around the world as we launch into 2019.
In fact, I would add, while last year was a down year for equity markets around the world, statistically it's very unusual to have two negative years back to back in the markets. So with this information, we know that we don't just live in a vacuum, it affects us. And we begin to wonder, what should we do? And there's a couple types of responses that we hear often through conversations with clients, with folks we know, perhaps with some of you. One of the trends that we hear, one of the emotional responses is what I call MOS, missing out syndrome. And so, missing out syndrome basically manifests as a feeling of I don't want to miss out on the next hot thing.
We feel sometimes, I remember at the end of 2017, all the news was about Bitcoin and what a phenomenal opportunity blockchain investing had. And so clients who had heard about Facebook or heard about Google going public or heard about other hot investments didn't want to miss out on that. And so greed can drive us to want to make choices. But it's important to realize that greed is not a strategy. Some people call this the lottery effect, the annual amount that Americans spend on lottery tickets is $73 billion, and yet you have a one in 292 million chance of winning. The percentage I wrote it out here on my notes, it's too many decimals for me to even remember how to enunciate it. Your odds are infinitesimal. And yet the amount of excitement. Of large returns, clouds, the better judgment of people. And we make decisions that reduce our overall chance of success by buying more tickets.
Now, you might not be tempted by the lottery, but perhaps you've thought or felt or can relate to wanting to invest in the next great company, regardless of how expensive their share price is. Or you want to invest in the best companies today regardless of where the price is, Facebook or Amazon, or Apple, maybe you want to try to get a good win by finding a cheap penny stock that's undiscovered or just following the herd based on articles you read in magazines or newspapers. So one of the responses it's important to be aware of is again this I don't want to miss out on the next hot thing. MOS. Be aware of being diagnosed with missing out syndrome.
The next response is actually a really common one over the last couple of years. And this has to do with feeling like you're missing out on the market's returns. It's, my portfolio is too conservative, I'm leaving too much money on the table. And this is exemplified by what we call S&P envy. All right. Now, I want to put the diagram up here. I get what I'm saying. We all know that the S&P, the biggest 500 stocks in the U.S., have had a phenomenal run over the last nine years. And so it's been a really hard to look at a diversified portfolio, which you almost certainly have and say, I could have just been in the S&P 500 and done better than I did. And so this has been a perfect market over these last 18, 19 years for S&P envy and I want to walk you through this really row by row.
Okay. From 2000 to 2002, the S&P fell with the Y2K recession about 38%. And people with a portfolio of stocks and bonds were still down 13%, not as much because they were diversified, but they were still down. And so the investors experience was, I still lost money, which doesn't feel good. Then the market came roaring back over the next five years from '03 to '07. The S&P is up 83%. Portfolios with stocks and bonds aren't up as much, but still nearly 60%. And people are disgruntled because they didn't do as well. They didn't make as much money. '08 comes along, the bottom falls out, the S&P is down 37%. Portfolios that own stocks and bonds found they were both down in that recession and down 20%. Now, I'm upset because I lost money again.
The great bull run of the last nine years has seen the market rebound 252% or 258%, excuse me, and a diversified portfolio is up 150%. So again, this feeling of I didn't make as much as the S&P. But when you add up that time, what you see is that the total return of the S&P was 158%, meaning 100 grand at the beginning of the century would have grown to 157,000. And a diversified portfolio. Even though it felt like you were losing money and not making as much and then losing money again and not making as much cumulatively, it resulted in a return of over 175% and nearly $20,000 more.
And I would argue a much more comfortable ride by not being down nearly 40% for four of the years during the time period. And so it's important to realize that diversification overtime wins. Even when it feels like it's losing. Now, the final sentiment I want to talk about just emotionally is the fear that can come when the market gets volatile. And we say something like, I just don't want to lose money. I don't want to lose money. When things are uncertain, I don't want to lose money. Now, one caveat, as you know, when the market when your portfolio or the market goes down, you don't lose money if you leave it there any more than you lose money on the value of your house.
If real estate goes down for a little bit, but you just keep living there, you only lose if you cash out and start over. And so it's important to realize that short-term volatility is really insignificant. And the longer you invest, the lower the risk of losing money. In fact, if you notice the one-year time horizon. Stocks will make you money and post positive returns three out of every four years. Over a five-year period, you have an 88% chance of having a positive return. And over a 15-year period, any 15-year period of time from 1926 through the end of last year. If you just stayed in, you had positive returns almost 100% of the time. And so time really is the healer of market wounds.
Now with all this said, what can you do? What is the most helpful way to approach things? And what's the right perspective? First of all, have a plan. Focus on your goals and not the news. As I said before, it's historical fact, not headlines. That should be the basis for your plan. Now, to piggyback on our diversification point, lose less to win more. Here's two charts. Two portfolios over the last, since the beginning of the century, since 2000 through the third quarter of last year. You can see the two portfolios end with almost the same amount of money. But notice where they went in the process. The downs in the portfolio on the left, which is all stock, were much more significant than the downs of the portfolio on the right, which is a blend of stocks and bonds.
Diversification wins by not losing. Really, really important principle. Also don't miss the opportunity to think globally. Over the last nine years, the U.S. stock market is represented by the S&P 500, has had a phenomenal run, no question about it. And so it's led many investors in the U.S. to have a strong home country bias, meaning when they build their portfolio or look at their portfolio or compare it to a friend or a magazine article, they think I need to have as much S&P 500 here as possible because of that home country and recency bias. That's the area that has most recently been performing well.
But the S&P 500 people have quickly forgotten, I find, posted returns of 0% during the prior decade from 2000 to 2009, when international stocks had a very nice run. In fact, if we look at rolling ten-year periods of time, going back nearly 50 years to 1970, we see that 50% of the time international stocks were outperforming and 50% of the time U.S. stocks outperformed. So how do you try to guess when international might outperform? International outperforms the lower U.S. returns are. In a period like the last nine years when U.S. returns have been in the double digits, clearly, international stocks have not outperformed.
But if the cycle is beginning to flip and U.S. returns may be lower than six or lower than 4%, or expectations thereof, the pendulum may be swinging in a way that would favor international stocks more than U.S. stocks over the coming decade. Now my next to last diagram. Don't forget the long-term view. The chart here is a simple one in the world of financial planning, but an important one. This chart just shows the last 30 years comparing put money in the safe bucket of cash versus having a good diversified portfolio. The cash run is a lot more stable, but far less results and doesn't keep up with inflation.
A diversified portfolio of stocks and bonds rebalanced regularly grows $100,000 to well over a million in the same 30-year period. In fact, looking back a decade at what felt cataclysmic in 2008, it barely registers on the radar looking in the rearview. Time is a really, really important thing. And so if you feel nervous listening to the news or watching headlines, my best suggestion is to turn off the news. I was challenged once, a couple of years ago by someone at a conference who said, Have you ever watched the news and actually felt better about your day? I thought, you know, you're right. There's a lot of news that we don't need to listen to, and that doesn't help us be better investors, citizens, or spouses, for that matter.
Finally, in terms of staying invested, I want to show you one final chart, and that's this one. If we look at investing $100,000 over the last 20 years, even with the flat decade from 2000 to 2009, and even with the really choppy fourth quarter ending to 2018, your $100,000 would have quadrupled in value if you'd stayed invested. But if you get nervous and actually pull out. If you miss just the five best days, and of course, you never know when they're coming until after the fact. Missing just the five best days in that 20-year period cost you over a third of the value and missing just a month's worth of days costs you all the gain entirely. Stay invested is often the best course of action.
So let me wrap up here. We talked about what happened in '18. We talked about the outlook for '19. I think we could sum it up this way. Be cautiously optimistic. The news you hear each day may not be the best long-term view. Pay attention to your own emotions when things seem really rosy. Be critical. Be cautious. I have an adage I call the taxi cab driver barometer. When taxi cab drivers ask me questions about the market, that's usually the time to be critical and cautious because they're even trying to pile on to the good times. But when times seem bad, that's the time to be opportunistic. Remember, as I think Sir John Templeton or maybe Warren Buffett said, the stock market remains the most efficient place to transfer wealth from the impatient to those who are patient.
And so with that, the way forward is stay invested. Talk to your advisor. Stick with your plan. I close as I started. Thanks for your trust and confidence. Thank you for the chance to be of help. Feel free to give us a call or reach out if you have any questions or want to talk about any of this information or how it pertains to you. And as always, we appreciate your taking the time to listen in and certainly taking the time to introduce us to anyone you care about. Thanks so much. Have a great day.
