Wondering what the stock market is going to do this year?
John Scherer CFP(R) and Bridget Sullivan Mermel CFP(R) CPA discuss John's predictions.
We cover: How to think about the stock market How does the stock market's performance influence your life? Should you just take your 401(k) and head to Vegas?
Join us for what we tell our clients and ourselves about what the stock market will do this year.
TRANSCRIPT
Market Predictions 2021
John: If you just knew what the stock market was going to do next year, you could get rich. Stay tuned, because on this episode of Friends Talk Financial Planning, we'll tell you how to think about the stock market for 2021.
Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois.
John, we get inquiries about what's going to happen in 2021. And so I'm wondering what you tell people.
John: You know, it's interesting, Bridget, I used to talk about it. And what I think the truth is, is that, listen, nobody knows what's going to happen in the stock market going forward. And if they did, they wouldn't tell us about it, right? I wouldn't tell you about it, right?
But there's a different way... And I've come to realize that really what's going to happen... And here's what I think's going to happen this year: it's that there's a 75% chance that the market's going to be up this year.
So there's a chance that it doesn't, but really high odds that the market's going to be up. And at some point during the year, I don't know, it might be mid-year -- maybe depending what happens with the vaccine early in the year -- but I expect the market to go down 10 to 15% at some point during the year. But then on the full year is going to be up about 75%.
Bridget: Wow!
John: So that gives a little bit more confidence, like some interesting data. Yeah.
Bridget: So you think that there's a 75% chance that the stock market will be up for the year?
John: On the year.
Bridget: It's not going to be up by 75% this year?
John: No. Thanks for that. No, it's not going to be up 75%. That would be front page news!
Bridget: That would be great!
John: No, a 75% chance that we see positive returns in the stock market. And then, again, at some point during the year, expect it to go down 10 or 15%. And here's why I say that, Bridget. Let me let me share this with you.
I get this data from the "Guides to the Markets" from JP Morgan. We got data as of December 31st. Let me skip forward to this page over here that gives us these bar charts. This is factual data going back to 1980.
And the gray bars on this chart are the S&P 500 returns on the year. And you can see, you know, zero is the baseline here, so 75% 31 of the last 41 years has been positive returns.
And then these red dots down here, those are the intra-year declines. So between January and December how much the market has gone down in that decline, or inside the year -- of course last year is a great one to look at, right?
Bridget: Yeah.
John: Last March from February, where we had 33% downturn, but we ended the year positive.
Bridget: Right.
John: The year before that, we had a 7% it went down during the year. We ended the year positive. 2018 we had 20% down. It was late in the year, and the year was negative.
So every year, one of the interesting things about this chart is that every year there's a downturn. And it says here, the average of those is about 15%, 14%, right?
Bridget: Wow. Interesting.
John: And so when we take a look at this, it's really interesting that, boy, that sure sounds a lot sexier. We've got a 75% chance the market's up. And it's not because of what I think about the economy, or what I think about unemployment, or the new tax laws, all those things. It's because this is what happens over really long periods of time, right?
And then the idea of "Hey, the market's going to go down something like 10 or 15%." It's not because, again, of the new president, or taxes, or the vaccine. It's because this is what happens in the markets.
And if you can think about that... When the market does go down 10 or 15% at some point this year, what's going to be the headlines? What are you going to see on your news feeds, and that? It's, you know, "Vaccine is not as effective as we thought it was," or "Unemployment skyrockets," or, you know, fill in whatever -- I call it the "apocalypse du jour." Right? There's always something, and it always feels different.
Bridget: Right.
John: It always is. And then you go like, "Oh yeah, wait a minute!" No, when the market's down, 8 or 10 or 15%, that's kind of what we expect that to happen over time. You go, "Oh! Yeah." You know, it's sort of like...big yawn.
Bridget: Yeah.
John: And so, you know, the reality is that nobody knows what's going to happen in the market this year. And I don't know what's going to happen in it. But odds are that we're going to have a positive year, because that's what happens over time.
And this data goes back many decades before this. This is a handy way to look at it. And again, if you're interested, you can go google JP Morgan's Guide to the Markets. There's a lot of good information on here.
But I think this is a really useful one to look at as we think about what's going to happen in the market. It's "Golly, we don't know." And then, you know, chances are that it's going to go down at some point. Look at those red dots! I mean, it goes down almost every year at some point. But most of the time we end up positive.
And so that's just an interesting sort of a pithy way to look at those things. But that's the truth of things. And we could talk for hours on why this isn't that important anyway. That's not the important driver and success, right? I mean that's not what you talk about...
Bridget: Well, it engages people's emotions. And people make a lot of money decisions based on their emotions.
Now here's another question I have for you, because this is another inquiry I get, or sometimes people think this. It's "Geez, you know, the market... I hate watching my 401k go up and down. I might as well just take my money and go to Vegas, because it feels... Vegas is actually, quietly, it's probably more fun, you know, than watching my 401k go up and down. And I want to just go to Vegas." What are your thoughts, there?
John: Well, at least you get the bells and whistles, and you might get a free meal in Vegas, right?
Bridget: Right.
John: Or something like that? There's shows that go on.
And I'll tell you, you know, it's interesting that I talk about gambling and how that how that relates with investing all the time. And one of the things -- so there's that slide that we were just talking about, that there's a 75% chance, historically, that the markets are up.
Well, out in Las Vegas, if you pay attention to how they make their money out there, the advantage... Everybody knows that you lose money in Vegas, right? Over time Vegas, the house always wins. But their advantage is very small relatively.
Bridget: Right.
John: Something like average 5%. It's in the single digits, right? If you're a blackjack player...
Bridget: So that means that they win 55%, the house wins 55% of the time, and the gambler wins 45% of the time.
John: That's right. It's really close to a 50-50, tilted in the favor of the house, of the casino. But it's a pretty thin margin, because people have to win, or else they'd never go back.
Bridget: Right.
John: Nice thing in the stock market: if the stock market loses, nobody cares. Everybody keeps on investing in the stock market, right? And so when you think about those two things, it's common sense.
Everybody knows that in Vegas, the house wins over time. That's a losing proposition long-term. And yet the advantage, that difference, is really small. And yet we're afraid, we can be afraid of the stock market in various fashions, and yet the advantage of investing in the stock market is really big compared to the downside.
Bridget: Right.
John: So it's an interesting dichotomy where it's -- and you said it just a minute ago -- it's emotions. And that we accept that idea in Las Vegas. We see all the big buildings and casinos that they make, and all the money that goes to the house. You go, "Oh yeah, that's, you know, having a 55% chance of the house. That's a huge house advantage." And then we think about when we invest in stocks, we've got a huge house advantage like over time 75%, but it doesn't feel that way. It's that emotional thing.
And then part of it is the news cycle, right? Because it's... It is unemployment. It is, you know, a trade war. And it is the price of oil, or fill in the blank, right? And we read that, and we see that every day.
And yet if you're able to step back and take that macro view, common sense hopefully prevails. But that's not easy to do. That's the thing that makes investing such a difficult task. What do you think?
Bridget: It can be hard to tune it out, yeah.
John: That's right, yeah.
Bridget: I try to explain to people that there's an ongoing storyline with the stock market that the press picks up. And whatever... Some people say, the stock market up and down is... First of all, that's a record of day traders.
So whenever there's this explanation of "the stock market's up or down" because of unemployment, because everybody's on Zoom now, and so productivity is going to be higher. Or there's a stimulus package that's out. Or the... all the other explanations for why the stock market is up right now. That's just an explanation for the tip of the stock market that's up, and it doesn't reflect the general tide.
So it's not the big tide. It just reflects that top part of the market for people that are doing activities that I don't recommend doing. So that's what...
I try to get people to tune out to that storyline and tune into looking at their whole net worth, not what's going on in any one little part. So, having a bigger view and looking at what's happened long-term. "Okay, where were you at 10 years ago versus today, versus now?" And look at that, not "Where were you last week versus today?"
So those are the things that I try to get people to focus on, rather than focusing on "What are my predictions?"
John: You've said a couple of really awesome things in there. And one of the things -- and I think it sort of encompasses, and maybe that's a good way to wrap things up and look at the takeaways -- is that it's a component. Investment return is important, but it's a component of your plan.
And having a plan in place, and then this is one of the cogs in the wheel, but it's all... You know, you've got investing, you've got how much you pay, or savings, how much you save, how much you pay in taxes, how much you spend, all these other factors that are so important. And investment return is just one of them, right?
Bridget: Right. Absolutely.
John: The other thing that you said is talking about: hey, this is just the tip of the iceberg. I always wonder about it when they say, "Investors," you know, "sold to the market." Like, who are these investors? Nobody I know was out selling things! Right?
Bridget: Today...because of that? No, they sold money because they needed some money.
John: Right.
Bridget: The people that I know, that's why they're selling. It's "I needed some money today, so I sold." Or "I've got some money, so that's why I bought." Not...
John: Or, "I see the market going up or going down, and that makes me react, not the underlying cause," right?
Bridget: Right.
John: So, I'm a scuba diver, and so it's interesting that -- for people that have done any kind of scuba diving -- when you're below the water, it's just kind of calm. We do a lot of diving in Cozumel, and there's a current, and you kind of drift along, and it's just serene.
And there are times you come up, and you can see the boat up above you, and it's just rocking on these waves. And it's raining out there, and you've got no idea, because we're under the water. How smooth things can be relative to that top surface!
And so that's a really interesting way I'd never thought about explaining that concept. It's that, man, you get down 20 or 30 feet. The ocean's not roiling down there. It's that top 5 feet where it is! And that's really does apply to investing and how to think about this news cycle and what goes on in the markets and things.
So I think the #1 takeaway that I'd have for people here is: #1, have a plan. And understand that investment return is just a cog in the wheel of that overall planning. That overall net worth is what you're trying to accomplish. And then the other thing is just that, you know, you can make it sound really appealing.
Bridget: Right! Yeah.
John: "75% chance the market's up, and this, and down." And you go, "Golly, we gotta listen to this guy! He's got it together."
And the answer is that nobody knows this stuff. And it's not that important, right? Nobody knows what's going to happen.
And if your plan is set up right, it doesn't matter what happens in the next year. That's my real takeaways.
Bridget: Right.
John: I don't know if you had anything else to add to that side of it.
Bridget: No, I just really appreciate your take on this. I think a lot of people will relate to it, both the 75% chance of the stock market going up with a 15% going down at some point during the year. I mean, that really helps. Like, this is what you can expect.
John: Yeah, don't be surprised when the market goes down.
Bridget: You know, that's what you can expect. But the thing is that it's not every year. Some years it's not like that. Some years it goes down. You know, 25% of the time it'll go down.
And that's okay. You know, that's just what this game is. And the point is to look deeper and not let your emotional brain get carried away. Try to rely more on your wisdom brain or your long-term thinking and not your-short term thinking. So...
John: Great! I'll let you take it away, Bridget.
Bridget: Okay, great. I just wanted to wrap it up saying: first, subscribe! That helps us with the algorithm. So go down and subscribe.
And the second is we're both involved... The reason we know each other is we're both involved in an organization called ACP, or the Alliance of Comprehensive Planners. There's planners all over the country that think about things the way we do, and you can check out acplanners.org for more information.
John: Great. Thanks, Bridget!
Bridget: And with that, John, I'm going to wrap it up! Thanks!
John: All right. 'Til next time!
At Sullivan Mermel, Inc. we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.