The bull market may not last longer than 10 years, can it?
Don't bet against it, said Nick Maggiulli, who in a post on his blog "Of Dollars and Data" investigated what he calls "investor fallacy".
"Given the excellent performance in the US markets over the past decade, a correction seems appropriate," said the analyst from Ritholtz Wealth Management. "However, if you examine the data, you will find that this thinking is as flawed as the person expecting a tail after seeing five heads in a row."
It naturally refers to the player's misconception, which is the wrong belief that a certain event, simply because it happened more often than usual, is less likely in the future. The coin toss is the most common example: after five heads in a row, it feels like a tail is coming.
While markets are obviously not an independent process like the flip, historical returns do. In fact, as Maggiulli shows in this animated graphic, there is hardly any connection between the S&P 500's previous 10-year earnings
SPX, + 0.84%
and growth over the decade.
He then highlighted the 10-year return and future 10-year growth:
The trends are not easy to spot. What does it mean for those trying to work out a plan for how to tackle the market in the next ten years?
Well, in the past 10 years, the S&P has delivered compound interest of 13.4%. In the past, when the markets saw a double-digit increase, the following 10 years, according to the data, grew between 1.1 times and 5 times.
There is not much to do regarding the trend.
"I have no idea how the US markets will develop over the next 10 years, and history seems to suggest the same thing," he said. However, he found that metrics change over a 20-year period when the strong markets tend to reverse acidic the following decade and vice versa. If this trend continues, there is good news for investors:
Based on these numbers, S&P rose 6.3% between 2000 and 2019, meaning that stocks have grown between 4 and 5.5 in the past 10 years. Not bad.
But this is where it gets really interesting.
"Of course, history doesn't have to repeat itself in a meaningful way for 2020 and beyond, but if the S&P 500" only "doubles" over the next decade, that's the point, "wrote Maggiulli demonstrate:
"Think about how crazy this would be in terms of history," he said. “If you expect less than double the S&P 500 by 2030, suggest that the red star on the y axis be even lower than where I already placed it. If this were the case, it would be different from anything we have ever seen before. "
To go one step further: If history uses these numbers to accurately predict the outcome, the S&P would quadruple by 2030, Maggiulli noted.
"This statement seems crazy at the moment, but that's exactly what happened in the past," he said. “I understand that there is no law that forces the US markets to follow this trend indefinitely. However, if you forecast a terrible decade for US stocks, I have bad news for you – the evidence speaks strongly against you. "
For what it's worth, this decade with the Dow is definitely a bullish start
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closes over 29,000 for the first time on Wednesday and extends its profits with a three-digit jump in the Thursday session.