Riding the Rollercoaster

Thursday, August 4th, 2016

With the benefit of hindsight, we can see it would have been a bad idea to sell stock holdings after the Brexit vote. You would have locked in a 5% to 10% loss in a market that eventually trended upward to record highs. The same was true in the aftermath of the World Court’s decision that slapped China in the face by declaring man-made islands don’t transform an ocean into territorial waters, the attempted coup in Turkey or any other alarming headline which doesn’t materially affect a company’s ability to run its operations.

The bigger issue is that even if you think you know how markets are going to react to a particular event, you still can’t predict the timing. How will you know when quick-twitch traders will settle down and it’s time to reinvest? After the Brexit vote, it took a weekend for investors to realize this was Britain’s problem, not theirs. It could have taken a month.

The same is true for the time period we’re heading into now. As you can see from the accompanying chart, the average return for various months of the year has been pretty much the same across the spectrum. But August, September and October have seen higher highs and (of more concern) also deeper lows on average than other months. This additional volatility seems to be random and is, once again, impossible to time. Those who attempt to sidestep late summer and early fall could miss out on average gains for September and October of 1.05% and 1.21%, respectively. Skipping August would have saved modest losses of less than 1%, on average, but one suspects that this is a statistical anomaly.

Finally – focusing on the bigger picture – the current bull market, which started March 9, 2009, has now become the second-longest on record, beating the June 1949 to August 1956 rally. It is second only to the December 1987 to March 2000 advance. In terms of percentage change, we are experiencing the fourth strongest bull market on record, though at times certainly it has not felt like a strong bull market.

Doesn’t that mean it’s time to take our chips off the table?  If we knew how to time the market, if we could be sure the market run would not continue for another few years then the answer would be yes. Once again, even if we did exit, how would we know when to get back in?  Investors who bailed during the 2008 downturn missed much of the surprise upturn and their opportunity cost has only grown since.  Those who hung on more than made up for their losses, even though it seemed as if every year would be the aging bull’s last.

It is certain there will be a lot of scary headlines between now and the end of the year, and it’s possible that the investment roller coaster is about to get bumpier. All of us wish we had a crystal ball to help navigate through uncertainty. In reality, what we do have is the historical record. And on this the record is clear: after the next downturn the market will eventually experience a new high. This has been the history since the beginning of our country. We want to be there and participate in it.

Month-by-Month Returns