Posted January 29, 2016
Stock market volatility generates huge amounts of attention, and for good reason. Many people, not just investors, rely on investments made into the stock market for retirement savings. But do we need to pay so much attention? Is some of the hype of CNBC and Fox Business generated for our entertainment rather than actual useful information? Perhaps. Is some of the stock market volatility a self-fulfilling prophecy of our appetite for information, especially bad short-term information? Perhaps again.
Major Crisis and Events
Over the last 6 to 7 years, the world has gone through a variety of disasters, catastrophes and major events. And the stock market has responded. Some of the events loosely make sense such as the summer of 2015 when the US Supreme Court affirms a portion of the Affordable Care Act. What did the stock market do? Yep, had a week of selling. Chicken little would be proud.
One could argue that ACA is connected with world economy. But how about an Ebola outbreak in Africa at the end of 2013? Or when Russia launched airstrikes in Syria in the fall of 2015? It appears throughout the stock market history that major institutional investors, which are ran by humans with computers, are trigger happy and look for anything to bother themselves into a panic.
Conversely, in the beginning of 2014 the US real gross domestic product growth falls at a rate of 2.1% and ISIS begins an offensive in Iraq. At the same time, the stock market as measured by the S&P 500 index maintained a steady climb until the summer of 2015 when Argentina defaults on its debt. Most people can’t pick out Argentina on a map. Here is the link to First Trust’s timeline for the past 7 years showing stock market volatility and world events-
Perhaps major crisis and events don’t play as much of a role as we expect. Perhaps a lot of the stock market volatility might be loosely correlated with world events, but not directly caused by them. Perhaps we see a dip in the market and quickly try to find something or someone to blame. Yes and no. Most women diagnosed with breast cancer drank a diet soda so there is a correlation between cancer and aspartame. But how many women drink diet soda and don’t get cancer? Millions. So, there is correlation without causation with artificial sweeteners.. and with world events.
Let’s look at oil.
The world runs on oil. And most people think about gasoline or perhaps airline ticket prices, and while that is mostly true so many other products come from petroleum such as plastic. Oil prices dropped over 54% from June 2014 to January 2015. Cause of alarm? Perhaps. But consider this-
|Time Span||Oil Price Drop||S&P 500 Total Return
The Following Year
|Oct 1985 to Mar 1986||66%||26%|
|Sep 1990 to Feb 1991||52%||16%|
|Dec 1996 to Nov 1998||57%||21%|
|Jun 2008 to Jan 2009||70%||33%|
This has to be taken in context of course. If you dropped 10% and then gain 10%, are you even? No! This is the common problem with these types of statistics. Let’s say you have $1,000 and it dropped 20%. You now have $800. Easy. Let’s say you gain 20%. You now have $960. You would need a 25% increase to break even. Remember, the percentage gain is based on the current underlying value, and if that is already depressed, then your gains look great.
Let’s look at some stock market history and over-reaction from presidential elections. This drives us nuts. How influential is the President of the United States? Some would say not very much. He or she cannot really do much without Congressional approval which is comprised of 435 Representatives and 100 Senators. Can you name your Senators? Great, 1 of 2. Can you name your Representative? You know, the guy or gal you might have voted for to represent your interests. Probably not, and that’s OK. Heck, the CEO of Google or Facebook is way more powerful than POTUS as far as the stock market goes.
But for some reason, we lose our minds over the presidency. Again, this might be the natural by-product of the hype and sensationalism of certain news channels who frankly couldn’t drum up more than 30 minutes of news it weren’t for stock markets and elections. Maybe we should go back to just having nightly news and Atlanta Braves games, Ted.
Here are some considerations-
- There have been 22 elections since the S&P 500 Index began in 1928
- 18 of the 22 years (82%) provided positive performance during an election year
- When a Democrat was in office and a new Democrat was elected, the total return for the year averaged 11%
- When a Democrat was in office and a Republican was elected, the total return for the year averaged 13%
Who was the best? Roosevelt in 1936 had a 33.9% rate of return in the S&P 500 but this goes back to the “gains always look good after a big drop” theory. Ronald Reagan in 1980? 32.4%. In general, Republicans have enjoyed a 15.6% average return while Democrats have observed 7.6% average returns. No, we shouldn’t have Republicans every presidency but usually Democrats screw things up so badly that it is easy to shine as a Republican. Kidding.. relax.. only a joke. Religion and politics should never be discussed outside the home.
All election years combined have been 11.3%.
Buy High Sell Low
According to Morningstar’s analysis of stock market history, the average rate of return for the S&P 500 Index for the past 20-year period ending December 31 2013 was 9.2%. If you missed the top 10 days of the stock market in terms of gains, the average rate of return drops to 5.5%. Top 20 days, down to 3.0%. That is 20 days out of 5,000! You miss 20 days out of 5,000 and you keep up with inflation. Yuck!
The Magellan Fund from Fidelity has a rate of return of 16.2% since its inception. Very good. One of the hallmarks of all mutual funds. However over 85% of investors in Magellan lost money. Huh? How could you lose money if the average annualized rate of return was 16.2%? Easy. Buy high sell low. Some observers say investors bought high on greed and sold low on fear. This is the classic market timing error. How many times do you hear people say something silly like “The stock market is on a rocket ship, I should buy.” Too late. By the time you see it, it is already gone.
Stay invested. Invest wisely. Have a plan. But stay invested. Don’t watch from the sidelines or be a wall flower.
Here is another consideration. If you look at stock market history from 1926 to 2015 which is 81 years, and measure the average rate of return over 81 rolling 10-year periods, only 4 had negative total returns. In other words, 1926 to 1936, 1927 to 1937, 2005 to 2015, and everything in between, only 4 periods were negative.
Wait! There’s more. The dot com bubble lasted 2.1 years around 2000 and the stock market dropped 45% yet the growth period following was 108% and lasted 5.1 years. The great panic of 2008 lasted 1.3 years and dropped 51%. Growth from 2010 thru 2015 was 216%. Here is a lovely chart from First Trust-
Combatting Stock Market Volatility
This the classic lesson of you cannot control others. You can only control how others affect you. Nothing could be more true when reviewing your investments and planning for your retirement. You should meet with your financial advisor (the Watson CPA Group knows several to recommend) and review your asset allocations. Are your investments meeting your objectives? Is there style drift in a fund? Does it still support your asset allocation? Does your portfolio need re-balancing which is suggested annually to ensure objectives are being met?
Don’t fall for the short-term sensationalism. Have a plan. Review and modify the plan. But stick to the plan. As one of the best bad guys ever, Alan Rickman said in Die Hard portraying Hans Gruber, “Don’t alter the plan.” Well, even Hans had to alter it when faced with the likes of John McClane. Great movie.
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