Overall 2019 was a good year for returns in the stock market, but if you look at these returns without context, they can be very misleading.

CBS news came out with an article entitled, “Stocks close the year with the best returns since 2013.” In it, portfolio manager Keith Buchanan said, “We had a remarkable year of returns in the stock market.” Most portfolios have already recovered from the short 2018 downturn. What could possibly be wrong with all that?

How these great returns can be misleading

The problem is that when they say “stock market,” they’re talking about just three narrow indices: the S&P 500, the NASDAQ, and the Dow. These indices represent only large US growth companies—a small portion of the entire stock market.

As you can see, these indices did have great returns:

Index2019 Return
S&P 50029%

But a lot of areas around the world didn’t have quite as big of a year. Emerging markets returned 16%, Japanese small companies 18%, and emerging markets small up about 15%, to name a few. Those are solid returns, but they’re not quite the huge returns of large US stocks.

This means that a properly diversified portfolio shouldn’t have as high of returns as the S&P 500 and these other large US stock indices. We have to remember: staying diversified means there will always be something with better returns than you.

These returns are misleading because someone with a diversified portfolio will see the media call them “the stock market” and then wonder why their returns haven’t been as good. They’re also misleading because those three areas of the market (emerging markets, Japanese small, and emerging small) each had returns over 35% in 2017, so these aren’t the best returns in “the stock market” since 2013.

Whenever someone starts talking about “the stock market,” always ask, which stock market?

Are we due for another downturn?

Now, large US stocks didn’t just do well in 2019, they’ve been on a pretty good run. Out of the last 11 years they’ve been up 10, so a lot of people are concerned that we’re due for another downturn. Again, however, this is misleading because it leads us to believe that all areas of the stock market are on a similar run, and that’s not true.

No other area of the market has been up more than 8 out of the last 11 years. Emerging markets small and international value have had positive returns only 7 of the last 11 years, and emerging markets value have been up only 6 times—barely half. So not all areas of the stock market have been uniformly up as much as large US stocks have been in the last 11 years.

That means that the market–as a whole–is not quite as hot as you might be led to think if you’re solely focusing on large US stocks.

Is the market overpriced?

Is the market overpriced? Well, some areas of the market are a bit pricier than others. Guess which ones? Large US stocks—the area that’s been on a run is up to about $20 for every dollar of earnings. That means if you’re buying a stock, you must pay $20 for each dollar the company makes. For context, the historical average for this area of the market is 16 to 1. But other areas are about 15 to 1, and some areas are all the way down at about $10 for every dollar of earnings. So, not all areas of the market are really overextended by any stretch of the imagination.

In any case, I don’t worry about market downturns because it drives you to market time and try to figure out where it’s going to go next. Will large US stocks come back down to earth? Most likely, but I have no idea when. I do know that I’m going to stay diversified because you never know when it will happen. And when it does, it usually happens suddenly, so I want to already own the other areas of the market that might go up in its place.

If you’d like to talk with one of the Paul Winkler, Inc. advisors personally about your portfolio diversification and plan, we’d love to chat. Schedule a free call with us here.

Of course, you’re welcome to just come on in to our office when you schedule an in-person meeting here.


Written by Paul Winkler

*Advisory services offered through Paul Winkler, Inc. (‘PWI’), a Registered Investment Advisor. PWI does not provide tax or legal advice: Please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase or sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.

Indices referenced:

S&P 500

  • January 1990 – Present: S&P 500 Index
  • Total Returns in USD
  • Source: Standard & Poors Index Services Group
  • January 1926 – December 1989: S&P 500 Index
  • Source: Ibbotson data courtesy of © Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated works by Roger C. Ibbotson and Rex A. Sinquefield).

Small Cap

  • Source: CRSP, total returns in USD$
  • Small Company Universe Returns (Deciles 9 & 10) – All Exchanges
  • Oct 1988 – Present : CRSP Deciles 9-10 Cap-Based Portfolio
  • Jan 1973 – Sep 1988: CRSP Database (NYSE & AMEX & OTC), Rebal. Quarterly
  • Jul 1962 – Dec 1972: CRSP Database (NYSE & AMEX), Rebal. Quarterly
  • Jan 1926 – Jun 1962: NYSE, Rebalanced Semi-Annually

Emerging Markets

  • January 1997 – Present: MSCI Emerging Markets Value Index (gross div.)
  • Total Returns Gross Dividends in USD
  • Source: MSCI

DOW: The Dow Jones Industrial Average, or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market.

Nasdaq Composite Index: Feb 1973 – Present: NASDAQ Composite Total Return. Source: Morningstar