Keeping Returns in Perspective
As investors, we have a tendency to get too excited on the way up, and overly pessimistic when markets go down. I think the following chart may help us all remember that markets, like Olympic sprinters, cannot maintain an intense sprint forever. Eventually, they must rest.
The above chart is a perfect example of a market that charged higher and needed to take a rest. The stock market ran up more than 40% over nearly 19 months (June 2016 to February 2018) without stopping to catch its breath.
The Return of Volatility
It is often said, negative volatility is the price investors must pay for the higher potential returns of owning stocks. Fortunately, for investors, this saying has held true in recent years and we have been rewarded with higher rates of return.
When comparing the return of the S&P 500 Index against the Barclays US Treasury Total Return Index, investors have experienced four times higher returns since 1996.
Here’s the proof:
Using History as a Guide
Nobody knows the future, but we do know the past. It is often said, “History doesn’t repeat itself, but it often rhymes.”
By looking at history through a “seasonality study”, we can see over the past twenty years, April has ended the month higher 70% of the time. On average, it has produced gains of 1.7%.
In addition, I saw a data point that suggests the second half of April has far better returns than the beginning of the month.
Let’s hope the pattern of a better second half of April is in the cards for us this year too.
Closing Thoughts
The old saying, Markets go up and markets go down, holds true today just as it did last week and last year. A ten percent move lower off of all-time high feels bad today, but in the context of history, this type of move is a routine and part of a healthy bull market. It keeps investors grounded and protects us from over exuberance.
With this said, I am closely monitoring my market indicators looking for signs that something has changed. As of right now, indicators continue to support the current bull market in stocks. Additionally, my “buy on the dip” indicator is close to signaling a potential buying opportunity.
As I always say, when the facts change, so shall we. Right now, the facts continue to support the bull market, and we will act accordingly.
