Hi Guys,
Much has been written and discussed relative to the miserable equity market performance year to date. We’ve experienced such sad performance many times historically, but not at the opening bell announcing a new year. Does this signal an exceptionally unhealthy year for the market?
Maybe, maybe not! Projecting equity returns is an art/science mixture that not many folks have mastered. Certainly not me, and certainly not many of the acknowledged experts. That too is sad, but statistically true.
A few seasoned and wise investors caution us not to be over-reactive to this dire start. Don’t allow concern to turn into fear to morph into panic.
Market volatility has long been the bogeyman that promotes profit losing decisions for investors who can’t simply “do nothing”. Often, just standing still is a proper response. Why? Because volatility is just an embedded characteristic of the marketplace. There is plenty of evidence that supports extreme volatility within an annual market cycle.
Here is a Link to a J.P. Morgan report that provides a serious historical perspective:
https://www.jpmorganfunds.com/blobcontentheader/202/900/1158474868049_jp-littlebook.pdfIt is J.P. Morgan’s annual report on “A Guide to the Markets” for 2016. The report incorporates many charts that an investor might find helpful in quelling fear and panic. If you are even mildly statistically inclined, you’ll love the presentation material. It is a gold mine of useful data. You get to interpret these terrific data charts based on your own experiences, goals, preferences, and biases.
Please focus on the summary chart presented on page 10 of the referenced document. It shows S&P 500 returns dating from 1980. The most compelling aspect of the Figure is that it demonstrates “S&P 500 intra-year declines vs. calendar year returns” for each of these recent 36 years. That’s enough data to be statistically relevant. This is a keeper chart.
Note the 27 years of positive annual equity returns and compare the returns columns to the “red dots”. The “red dots” denote the intra-year decline during each year.
If you were an especially loss adverse investor, it is likely that you might have abandoned the S&P 500 even when the annual reward was highly positive by year’s end. Market volatility or noise could have frightened you to make a rash, imprudent decision. The courage to staying the course during these years was well rewarded.
Note also the rather subdued downside volatility recorded over the last 5 or 6 years. The behavioral wizards might suggest that the recency bias from those experiences has preconditioned a worried investor to be overly reactive as volatility reestablishes itself once again.
I sure can’t predict what the market returns will be this year. But the referenced J.P. Morgan curve suggests that some patience is warranted. Market volatility is now high, and that by itself could be a warning signal. Conflicting signals are the rule and not the exception in the investment world. That contributes to risk, and that’s precisely why there is an equity premium of 5 to 6 percent.
Stay cool, stay healthy, and stay the course. I plan to do all three. Unfortunately, plans, execution, and outcomes often diverge.
Honestly, you likely need more than the J.P. Morgan report, but I wanted your attention. Sorry for the exaggeration, but I didn't want you to miss this really good stuff.
Best Regards.
Comments
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Investors' axiom: The value of analysis is inversely correlated to the number of charts used.
Statistics (charts) are used much like a drunk uses a lamppost: for support.
Encyclopedia of Chart Patterns, John Murphy.
I am surprised by the “lamppost” quote that you attributed to John Murphy. He is a longtime committed technical analyst who has authored several fine market technical analysis books. I met him several times a few years ago, and he is a true believer of the technical analysis approach to investing success.
I have been exposed to the lamppost saying several times, and I suspect it would be more appropriate to credit it to baseball announcer Vince Scully. I suspect the quote is dripping with sarcasm. It is witty but is not real wisdom. I prefer the quote from George Bernard Shaw: “It is the mark of a truly intelligent person to be moved by statistics,”
Certainly statistics can be handled badly and misused to distort the results, to corrupt the actual findings. These are perversions that can be detected by numbers detectives.
The marketplace is awash in data. It is overwhelming. Statistics are simply a way to organize that data, and graphs are simply a way to succinctly present that data. Statistics and their graphs are useful tools to help the decision making process.
How do you choose a fund manager? I do seek low costs, but I’m also guilty of seeking and choosing a manager who has an impressive record compared to a number of applicable benchmarks.
When a baseball manager selects a pinch-hitter, he is likely to consult the past records of his hitter options against the current pitcher. When I cross a street against the light, I subconsciously assess the likelihoods of getting hit by the oncoming traffic. There are endless examples of everyday application of statistics, both consciously or subconsciously.
Statistics not only matter, they matter greatly in most of life’s decisions.
Thank you for your comments. I’m sure they attracted attention, and I want as many MFOers as possible to have the opportunity to consider the referenced J.P. Morgan resource. It’s a treasure chest of market data that are nicely summarized in a chart format.
Best Wishes.
If you have something to say a simple chart can support your position. The more charts the less value there is in the commentary.
I think there are some who think the more words, the more charts the stronger their position. Less is more.
As to statistics, you need to use the right one. I think the one you chose is an example of a bad statistic for the purpose proposed.