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Only two other times since George Washington was president has the U.S. stock market been as far above trend as it is now

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Here’s some disturbing news for those of you who think you’re basing your investment strategy on history: The U.S. stock market must fall 43% in order to be in line with the longest-possible trend in its history.

This trend to which I refer traces the U.S. stock market back to 1793. The data, adjusted for both dividends and inflation, are plotted in the chart below. The source is Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara [Calif.] University who has spent years reconstructing U.S. stock market history.

The chart also shows the exponential trendline, which is the line that most closely fits the data on a logarithmic scale. (Such a scale is one in which the same vertical distance always represents the same percentage change.) As you can see, there have been a number of times over the past 227 years in which the stock market was well below trend — each of which represented highly opportune occasions in which to establish long-term equity positions.

Now is definitely not one of those times. In fact, as the chart shows, there have been only two other occasions when the U.S. stock market was as far above trend as it is now: the late 1960s/early 1970s and at the top of the internet bubble. We all know what happened after those two periods. The internet bubble burst, taking stocks with it, and the stock market from the bear-market of 1973-74 went nowhere on a dividend-adjusted and inflation-adjusted basis through 1985.

Respect the history

Is something equally traumatic guaranteed to be in our immediate future? Of course not. Nothing in the stock market is assured. But keep this long-term perspective in mind the next time your hear market analysis based on the “long term.” Chances are the focus is a lot shorter than 227 years, which in turn means that there is a distinct possibility that — either wittingly or unwittingly — the data involved will support a pre-determined conclusion.

To illustrate these cherry-picking possibilities, consider the contrasting conclusions you can reach depending on the length of the trendline you draw:

You could draw your trendline to extend back to the early 1920s. Relative to it, the current stock market is 9% below trend. Or you could decide to draw the trendline back to 1965. If you did that, you’d discover that the stock market would have to fall 37% in order to return to the trend.

To add to the complexities, you also could draw a trendline without adjusting for dividends or inflation. You could focus on different stock market benchmarks that reflect narrower swaths of the market than does McQuarrie’s database.

Nevertheless, you should know that many of these alternate ways of drawing trendlines also lead to conclusions that are just as bearish, if not more so, as focusing on the trend back to 1793. For example, Jill Mislinski of Advisor Perspectives recently calculated the S&P 500’s
SPX,
+0.93%

 trend back to 1871 on an inflation-adjusted basis but not including dividends. “If the current S&P 500 were sitting squarely on the regression, it would be at the 1451 level” at the end of September — or 57% lower than it actually closed at the end of that month.

What about the Nasdaq Composite
COMP,
+0.85%

 ? That index was created in 1971, so less data are available for it. But it’s more than 30% higher than a trendline drawn back to then.

These myriad possibilities can be confusing. But they serve to remind us that there are many judgment calls to be made when reading the historical tea leaves. So when you hear a conclusion about stocks over the long-term based on anything less than the full 227-year timeline of the U.S. stock market, ask what the result would be if that entire history was counted.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

Read:Many stock investors are too young to remember Black Monday in October 1987 — why that’s a problem

More: ‘Warning sign’: Dow industrials lag behind as transports keep making new highs



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These money and investing tips can help you stay upright against the market’s headwinds

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you greater knowledge about the financial markets’ current condition as you monitor your portfolio and plan ahead. Plus, check out several short videos about whether to include bitcoin and other cryptocurrency in your portfolio and how to go about it if you do.

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Opinion: I took advantage of the 2020 RMD rule but now my 1099-R looks wrong — what should I do?

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Q: I took advantage of the 2020 RMD rule and returned what I had taken from my IRA thinking there would be no taxes. I just got a 1099-R showing the full RMD. That can’t be right. How do I correct it?

—Pauline

A.: Pauline,

If the 1099-R is incorrect, you will need to contact the firm that issued the statement to get it corrected. However, the 1099-R is probably correct.

Read: Are there new RMD rules this year?

Under the law, the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. The issuing firm need only report what was paid out of the IRA on 1099-R.

Not sure where to retire? Let us help you find the right spot

That does not mean you will pay any tax. Any funds returned to the IRA by Aug. 31, 2020 is considered a rollover and is not taxable. Normally, Required Minimum Distributions (RMD) are not eligible for rollover, but IRS guidance after enactment of the CARES Act that waived RMD for 2020 changed that. The guidance stated the normal 60-day time limit for rollovers would not apply and instead instituted a fixed deadline of Aug. 31, 2020 to return such distributions and avoid taxation.

Read: It’s not too late to save on your 2020 tax bill — here’s how

I get similar questions about 1099-Rs every year. The reporting of the gross distribution looks like an error but in most cases, it is correct and the person receiving it simply hasn’t learned how it is accounted for yet.

Here’s how the accounting typically works.

As with any gross amount reported on Form 1099-R, you declare the amount that is not taxable when you file your 2020 tax return. What I hear most tax preparers would do in your situation is put the gross distribution amount from 1099-R on line 4a as per the normal procedure. Then, they would place a zero in 4b of your Form 1040, and put a note on the return near those lines that it was “returned to the IRA under the CARES Act,” “CARES Act rollover,” “CARES Act,” or simply “Rollover.”

Read: These are the best new ideas in retirement

If you did not return all of distribution by the deadline, the portion that was not returned would be taxable. You would put that number on line 4b.

Read: 5 things to do if you inherit a Roth IRA

As I mentioned a moment ago, the discrepancy between the gross distribution reported and what should actually be taxable comes up in other situations. Three of the most common are other rollovers, Qualified Charitable Distributions (QCD), and distributions from accounts that had received after-tax contributions.

In all those cases, the reporting process looks like what I described above. You put the gross distribution on line 4a and the taxable portion on Line 4b. Then note why the numbers are different with “rollover,” “QCD,” or “See Form 8606” on the 1040. Form 8606 is the form used to determine the taxable amount of an IRA distribution when nondeductible contributions have been made to any of one’s IRA accounts.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.



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Video: Why Mike Novogratz sees bitcoin reaching $500,000 by 2024

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Galaxy Digital’s Mike Novogratz explains the outlook for crypto as Coinbase goes public.





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