Friday, February 16, 2018

Recent Volatility and the Headlines You Don’t See!

After a period of relative calm in the markets, the recent increase in volatility has renewed anxiety for many investors.

From February 1–8, the US market (as measured by the Russell 3000 Index1) fell over 8%, resulting in many investors wondering what the future holds and if they should make changes to their portfolios.  Financial news outlets were quick to jump on the commotion, as you’ll find headlines filled with “chaos,” “turmoil,” and “panic.” However, here are a few of the headlines2
you probably didn’t see over the last two weeks.

“Another normal year in the market, as stock prices decline.”

“Recent decline offers little insight about the future.”

It’s natural to worry the sudden volatility was a sign of worse things to come, but a longer-term perspective shows us these types of declines are quite normal.

Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years had declines of more than 10%, and around a third had declines of more than 15%.

However, despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. As you can see, the recent decline is normal behavior for a functional auction market and tells us very little about the future.

“Market timing isn’t the answer.”

“Investors wisely staying in the game.”

Market prices aggregate the information and expectations of all the thousands of market participants better than we can individually. Information that’s available and the opinions of investors everywhere are built into current prices. If that’s true, stock mispricing can’t be systematically exploited. Meaning, we can’t time market!

This point, supported by the fact that a substantial proportion of stock returns come from just a handful of days, leaves long-term investors with plenty of incentive to remain invested. 

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index going back to 1990 and shows the impact of missing out on just a few days of strong returns. 

The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that mistiming or being on the sidelines for the best single days substantially lowered returns for the entire period.

“Savers rejoice as stocks go on sale.”

There wasn’t a whole lot of rejoicing the past few weeks, but should savers really fear these types of market declines? For those regularly contributing to their investments, the short-term volatility will actually aid their long-term returns. How? The assets they want to buy just went on sale! 

Figure 3 shows the historical growth of US Large and Small cap stocks. Since 1926, there have been tremendous amounts of ups and downs. Some were quite serious (Great Depression, the 1973 crash, Dot-Com Bubble, Great Recession). We were reminded these last two weeks that stocks carry risk. Yet long-term results reward disciplined investors, even through all the short-term volatility. So rejoice, savers, and keep saving!


While market volatility can be nerve-racking, reacting emotionally and changing long-term investment strategies can prove harmful. With each new decline, try to look past the noise and remember the headlines that you don’t see.


For more insight, view this video about expected returns before, during and after market declines. Market highs and market declines offer little insight about future expected returns (for the long-term investor).

1Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
2These, of course, aren’t actual headlines. Just simple truths you won’t always see in the papers!

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Saturday, February 3, 2018

Super Bowl Prediction (Go Eagles!)

Evon Mendrin
Pathways Advisory Group, Inc.

The Big Game is just around the corner, and you know what that means - stock market predictions!

Our very own Jeff Karst wrote back in 2012 how successful the Super Bowl has been at predicting how the stock market performs through the rest of the year. The "Super Bowl Indicator" predicts that if the NFC team wins, the S&P 500 will be up for the year. If the AFC team wins, the S&P 500 will decline. Six years later that track record continues with an outstanding 80% success rate! With that kind of success, who needs economists?

However, what that really shows is we can find a connection and correlation between any two things if we really wanted to. Take the Sports Illustrated Swimsuit Issue Indicator or the Men's Underwear Indicator as further examples - we often try to find connections where it's simply pure coincidence.

As Jeff writes, it's silly to base our investments on the results of a football game. The preferred way, he says, is a well-diversified, long-term strategy that relies on the fundamental principal that companies will continue to find ways to be profitable.

But just in case - let's go Eagles!

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