Although Q2 was flat in terms of performance, it comes on the heels of two quarters of extraordinary returns. There have been plenty of ups and downs along the way, but overall the market is on an upswing. And the returns so far in Q3 have been strong — for those who stayed invested, at least. A lot of people were scared out by the volatility.
Market swings are a natural part of investing. They're driven by uncertainty, changes in interest rates, fear, and greed. But if you look at history, over long periods of time the average stock market return is 4-5% more than the inflation rate.
The last five years have highlighted that dynamic at warp speed. We've had some huge swings thanks to changes in economic outlook, policy, and investors' aversion to risk. But when you look at the entire period — even with the scary environments we saw at the start of the pandemic and in the first part of 2022 — returns for world stocks have been a little bit above average, at about 8%. If you shorten the time frame and look only at the past year, world stocks have rallied by about 20%.
We've seen economic conditions improve since last month, as inflation declined significantly and unemployment stayed low. If inflation continues to decline without a spike in unemployment or a drop in economic growth, more positive returns may be on the way. But if inflation is stickier than expected, or the economy slows significantly, there may be more turbulence.
Either way, my outlook is the same: over a longer horizon (five years or more), median returns are at 4-5% over inflation — pretty close to long-term averages.
What’s your take for the YTD so far? How is your portfolio performing?