U.S. stocks: Will the future look like the past?

Written by: Global Thought Leadership | July 14, 2017

Source: Bloomberg, as of 6/30/2017. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. 

The Bottom Line

  • Over the past five years, the S&P 500 generated a very impressive 14.6% average annual return1—which could easily tempt investors to take a rosy view of what strategies that track the index could provide going forward .
  • But no party goes on forever, and it’s important to remember that index strategies also expose investors to the full impact of any future pullback.
  • That’s worth considering given that recent market gains have displayed very narrow leadership. In the S&P 500, a small number of companies (primarily technology firms) that are heavily weighted in the index have driven much of the return.
  • That underscores the concentration risk inherent in market-cap weighted indexes like the S&P 500 when specific companies or sectors become overvalued and thus susceptible to reversals—or may simply offer less future potential than companies with lesser weightings.
  • Active strategies, of course, can provide a useful counterpoint to index strategies because they can underweight (or avoid altogether) stocks at risk due to elevated valuation and overweight those that appear undervalued relative to their future prospects.
  • Such an approach often takes the form of a concentrated, but still diversified portfolio, which allows a manager to thoroughly understand each company, which leads to a high level of conviction about each investment.
  • This approach is well suited to a long-term investment time horizon and a low turnover ratio, two factors historically associated with solid long-term performance.

1 Source: Bloomberg, as of 6/30/17.


IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Diversification does not guarantee a profit or protect against loss.

Active management does not ensure gains or protect against market declines.