What are normal stock returns?

2018 has seen modest returns for Canadian and International stocks, both coming in a bit under 2% in CAD at the end of June. US stocks have seen stronger returns, a little over 7% in CAD, driven mostly by currency. These numbers might seem low after years of double digit returns. 
The S&P/TSX Composite has seen double-digit returns in 3 of the last 6 years, the MSCI EAFE has seen double digit returns in CAD in 4 of the last 6 years and the S&P 500 has seen double digit returns in CAD in 5 of the last 6 years.
Are this year’s returns low, or have the last 6 years been unusually high? 
Double digit returns for Canadian investors have been the norm, on average, for the past 47 years.

Here are the compound average annual returns since 1970 in CAD:

S&P/TSX Composite Index (CAD) MSCI EAFE Index (net div.) (CAD) S&P 500 Index (CAD)
10.55% 11.24% 12.23%

Data Sources: S&P Dow Jones, MSCI, Dimensional Returns Web

Positive Returns

Returns have been positive for Canadian investors in Canadian and International markets in 34 of the last 47 years, or 72% of the time. The US market has had 36 positive years out of the last 47.

Of those positive years since 1970, Canadian and International markets have had 26 years with positive double-digit returns, while the US had 27 such years. Canadian markets have had 14 years with returns greater than 20% for Canadian investors, International markets have had 13, and the US market has had 15.
Negative Returns
Since 1970 Canadian investors have experienced Canadian stocks with double-digit drops in 6 years – 2 of those drops were greater than 20%, International stocks with double-digit drops in 9 years – 3 of those drops were greater than 20%, and US stocks with double digit drops in 5 years – 3 of those drops were greater than 20%.
Normal Returns?
20 of the last 47 years have seen Canadian stocks return between -1% and 15% for Canadian investors. International markets have seen 20 of the last 47 years’ returns fall between 9.33% and 29.33%. For the US market 20 of the last 47 years have shown returns between 5.14% and 21.14% for Canadian investors.
Expected Returns
PWL Capital uses a combination of historical risk premiums and current market valuations to determine reasonable expected return assumptions for stocks. As at the last update in December 2017, the expected returns for Canada were 5.95%, 6.68% for International stocks, and 5.50% for US stocks.
The Privilege of Knowledge
Markets will always be volatile. Even extreme negative returns, while less common, are normal in some years. Nick Maggiulli recently had a post extolling the benefits of having past market data available. Before we had easy access to data, there was no way to know what normal was.

However, though buy and hold might seem obvious now, that’s only because we have the benefit of hindsight, ubiquitous data, and modern computational resources. A century ago, who had access to anything remotely this useful? No one. People didn’t have the documented market history and technological capabilities we have today, so why should we have expected them to “buy and hold” back then? If anything, their history was riddled with banking panics and far more instability, so I can’t blame them.

We do not have the slightest clue what future returns will be, but what we can do is draw on the past to understand how the relationships between different assets work. It is probably reasonable to expect that there will be some risk premium for owning stocks going forward. It is probably reasonable to expect that there will be some risk premium for owning small and value stocks going forward. 

The market outcome of any individual calendar year should not be a concern. Normal is volatile. Normal is random. Understanding that makes us smarter investors.

Original post at pwlcapital.com