We Could See Even More Gains In 2020 — Here’s Why…

The stock market, as measured by the S&P 500, gained about 30% this past year. It was truly an incredible run.

The last time we saw this sort of return was 2013, when the market ended the year up 29.6%.

Here’s a bar chart of S&P 500 returns over the last 30 years so you can see how 2019 stacks up to past performances.

S&P 500 returns

However you look at it, this has been quite a year. But you might be surprised to learn that this wonderful year for the stock market has been “hated” by investors…

You see, typically when we have a good month or year investors pour more money into the stock market. For instance, in 2017 stocks returned a superb 19%. Investors, not wanting to miss out on future returns, poured $54.2 billion into stocks in the first month of 2018. That’s the largest monthly inflow in years.

The same holds true when the market is falling…

You might recall that this time last year the S&P 500 was in freefall. It fell as much as 15% in the month of December alone. Investors were scared. They yanked $57.4 billion from equities during that last month of 2018.

In short, investors typically put more money to work when the market is doing well. When the market turns sour, they pull money out.

So, I found it quite astonishing when I looked up what investors had done with their money this year — a fantastic year for the stock market.

Turns out, they’re getting out of stocks.

According to data from the Investment Company Institute, investors have pulled more than $196 billion out of their stock funds (stock ETFs and stock mutual funds) this year. This is the second-largest outflow from stock funds on record.

The largest outflow came in 2008, when investors jerked more than $200 billion out of their stock funds. As I’m sure you recall, that was about the worst year to be an investor in generations. Every asset class fell… a lot.

Why Fear Is Great News

Again, when the market is on a tear, we normally expect investors to pour money into stocks. When the market is crashing, we expect massive outflows.

So what’s going on? I can sum it up in one word: fear.

Despite the meteoric rise of the market, investors have been pulling their money out of the stock market. Fear is the only reason you’d do that. In fact, investors haven’t been this “scared” since 2008.

Had you decided to go against the crowd in 2008 and buy the S&P 500 starting in January 2009 you would be up a whopping 258% since then.

Of course, I have no idea what the markets will deliver in 2020 or the year after that, or where it will be in 10 years. But it seems that after so many years of incredible returns investors are still skittish.

That’s great news for stock investors. It tells me that we could continue to see wonderful gains from the market. Investor sentiment isn’t at euphoric levels, yet.

And if history is any guide, bull markets usually die shortly after a euphoric stage. If anything, you should be greatly concerned that a big market plunge will happen soon if everybody in the market is euphoric.

The fact that we’re not there means we should see the momentum from 2019 carry over into 2020. And we should be prepared to continue riding this wave.

But before we do, I want to wish you all a happy New Year. Here’s to a prosperous 2020.

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