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Large-cap strategies disappoint on the back of stock market volatility at the end of 2019.

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Overall, 2019 was a difficult year for stocks, and 2020 has shaped up to be even harsher given the COVID-19 pandemic. After a volatile December 2018, the market attempted to rally during the first quarter of 2019. There was a brief period of respite in July with performance ticking up, though that soon sharply reversed toward the end of August. Since then, stocks continued to struggle until the end of October. There was a rally in November through the end of the year as some uncertainty with regard to economic policies such as those governed by the Fed abated and investors became less cautious. After COVID-19 spread across the world, the markets responded strongly and dipped into bear territory, ending a long bull run. 2020 has been characterized by high levels of uncertainty and volatility. With the recent recovery in markets, stocks now trade on par with our analysts' fair value estimates after a period of undervaluation after the COVID-19 pandemic began to set in.

Taking a look at the cyclically adjusted price/earnings, or CAPE, ratio, which divides the current market price by the average of 10 years of earnings (adjusted for inflation), it currently stands at around 28.02, below where it was when we wrote the last article (30.62). This is compared with a historical mean of 16.72 and median of 15.79, with Shiller relying on market data from both estimated (1881-1956) and actual (1957 onward) earnings reports from companies represented in the S&P 500 Index. Today's levels are relatively in line with levels seen around events such as Black Tuesday and higher than levels seen before the Great Financial Crisis. The CAPE ratio is generally used to assess potential returns from equities over longer time frames, with higher-than-average CAPE values implying lower-than-average long-term annual returns going forward, which is what we're gleaning from the current ratio. While not intended to be an indicator of impending market crashes, it has provided warning signs for investors in the past.

Nupur Balain has a position in the following securities mentioned above: T, GILD. Find out about Morningstar’s editorial policies.