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It was the best of times, it was the worst of times
This opening line from Charles Dickens'
A Tale of Two Cities, sometimes describes the experience of equity investors. After years of steady increases, the S&P 500 fell a sharp 10.2% in just 9 trading days, ending February 8, 2018.
But that was quickly followed by 6 straight days of gains, with the S&P 500 recording its best week in 5 years. The wild swings serve as a reminder of why timing the market is so difficult and why it usually underperforms simply staying invested. We've made the point before, but often in the middle of a period of wild market volatility. In this moment of quiet we hope the message will resonate and bolster resolve the next time market volatility tests our mettle.
Missing the Best Days
The chart below shows the damage an investor would have done if he missed out on only the 25 best days (out of 11,620) since 1970. If you somehow managed to do this, your returns would have gone from 1,910% to 371%, reducing your annual return from 6.7% to 3.4%. To give you an idea of how lousy that is, 1-month U.S. T-bills returned 4.9% annually over the same period.
Best and Worst Tend to Cluster
Investors have no way of knowing when those 25 best days will occur, so we believe it's more profitable to ride out the bad days to make sure you don't miss the good ones. When studying those best and worst days, we see that they tend to cluster. The green dots below represent the 25 best days and the red dots represent the 25 worst days. Notably, they cluster during more volatile markets. All 50 of these days occurred when volatility was above average, as represented by the black line. Meaning, when you're most likely to want to exit stocks, after one or a series of bad days, the prudent thing is to keep stick with your game plan. The best days might be just around the corner.
Economic Fundamentals
Volatility like we just saw may be here to stay. But investors should keep in mind that stock market fundamentals remain sound. US economic growth is solid, consumer and business confidence remain high, and personal spending and capital investment are both likely to get a boost from the new tax law. Inflation
is rising, but it remains relatively low when compared to historical averages. Earnings season has been excellent, with a 15% increase in S&P 500 earnings in the fourth quarter and an 8% revenue increase, both nicely above prior expectations. Companies are just starting to announce how much in overseas cash they are repatriating back to the United States due to the new tax law, and a good portion of that cash is expected to be directed to share repurchases, boosting earnings per share.
Despite the likelihood that there will be some bad days in the equity markets, the combination of improved business fundamentals and fiscal legislation may sustain momentum in the economy and equity markets in the coming year and potentially beyond.
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After entering correction territory just one week prior, stocks recorded their best week since 2013. The tech-heavy Nasdaq performed best, helped by solid gains from Apple and Cisco Systems. The rebound appeared to be driven by reduced fears about rising inflation and interest rates. All the major indexes had positive year-to-date gains by the end of the week.
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> Inflation Today:
Recent inflation data has put investors on edge. But, it's important to remember that average annual inflation over the long term is between 3.5 and 4%. Today's level remains at or near 2%, well below the long term average. The chart below compares returns of the S&P 500 and inflation rates since the 1960's. Inflation was in the 4-12% range when stocks experienced their greatest weakness, a far cry from today's levels.
> Housing:
Housing finished last year on the uptrend and is starting the new year very strong. Housing starts surged in January to the second highest rate of the expansion. The strength is centered in multi-units, which had been lagging, but also includes a strong monthly rise in the dominant single-family category.
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"Single Atom in Ion Trap"
In the photo, the single atom is illuminated by a laser while suspended in the air by two electrodes. For a sense of scale, those two electrodes on each side of the tiny dot are only two millimeters apart (less than a tenth of an inch).
The image, titled Single Atom in Ion Trap, won first prize in a science photo contest conducted by UK based
Engineering and Physical Sciences Research Council.
A closer view of the atom:
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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