If anyone tells you that they know the where the stock market will be in a day, a week, a month, or a year, you might want to take their advice with a pound of salt. No one knows which way they stock market is headed. The direction of the stock market is fickle and can change course with the least amount of provocation.
The current year’s performance of the S&P 500 and the other major indices has been volatile, to say the least. Do you think anyone could have predicted the wild swings we have had so far this year?
February 11, 2016. The stock market averages were down over 10.5% for the year. People were panicking, selling their holdings. Putting their money in their mattress.
By April 11, 2016, the market averages had rebounded and erased all of the year-to-date losses.
On Thursday, June 23, 2016, the averages were up almost 3.5% for the year, but that quickly changed as the British voted to exit the EU. The markets hate uncertainty. Brexit was unexpected. Consequently, the market averages tumbled.
By the end of trading on Monday, June 27, 2016, the S&P 500 average reversed course and declined about 5% and was down more than 2% for the year.
Before than week ended, the markets had digested the impact of Brexit and decided that it might not have all that much on an impact, so by close of trading on Thursday June 30, 2016 — the end of the second quarter of 2016 — the markets recoiled and were back up more than 2%, essentially right back where they were just before the Brexit vote.
Things remained relatively quiet this past week — a shortened week due to the Independence Day holiday on Monday — until Friday.
On Friday, July 8, 2016, the jobs report came in better than expected and the market climbed another 1.5 percent.
That’s a pretty wild ride for about a 4% year-to-date gain. Historically, the S&P 500 gains about 8.5% each year, so that 4% return through half the year is roughly tracking history. However, may of us would probably rather see a smoother ride without the gyrations which have taken place so far this year.
It reminds me of the comparison of the main walking his dog uptown across Central Park. Let’s say the man and his dog are heading into the park at Columbus Circle — that’s 57th Street and Central Park West — and are heading uptown across the park to the Modern Museum of Art — that’s 82nd Street and 5th Avenue.
We can think of the path that the man takes walking uptown as a long term measure of the stock market. Generally speaking, he is heading up. He may not take the most direct path, but eventually he is heading up. His dog, attached to him on his leash, might have a less direct path. We can think of the dog on the leash as a short-term, perhaps daily indicator the the stock market’s movement. Like his owner — or “the can opener” as my wife an I fondly refer to us pet parents — the dog is eventually heading uptown towards the museum. However, unlike his owner, he is frequently distracted by various stimuli. There may be a bird or a squirrel that grabs his attention. There will certainly be trees and fire hydrants that demand his attention. There may be other dogs that he needs to discuss territory issues with. All these encounters have an impact on the dog’s short-term. As such, his route to the museum, like the man’s will eventually head in an upward direction. The difference between the man and the dog is that the dog’s route — like the stock market in the short run — may have wild swings, but like the stock market. Eventually it moves up.
The chart above shows how far we have climbed over the past five years. The S&P 500 has gained nearly 60% over that time span. There were periodic dips which you can see. For instance, in 2016, you can see the considerable decline early in the year, but as time passes, that decline (or change in direction to chase a squirrel) will likely feel like a minor diversion. Eventually, the short term direction becomes history and the long term smooths out and moves in an upward direction. The longer the time period, the less of a bump those declines appear to be.
If you look at the Dow Industrial average from 1900 through today, you can see huge corrections in the past two decades. Massive declines followed eventually by larger increases.
If you look at the earlier years in the left portion of the chart, you can barely see any change in the line at all. Relatively speaking, the movement is inconsequential. But if you look at the line between 1921 and 1942, you can see what appears to be a small bump. A slight upward bump and then down, but essentially a bump which looks like no real impact. That little bump was the Great Depression.
The chart above isolates out those first 50 years on the chart. Here you can clearly see the impact that the Great Depression had on the stock market’s valuations. Over a three year period from September of ’29 until the middle of ’32, stocks had declines a staggering 86.1 percent. Some blip! Nearly 100 years later, on a chart depicting the movement of an index which has gone from a low of around 40 to a high of slightly above 18,000, even 86 percent declines can appear meaningless in the rear view mirror.
Eventually the stock market moves up. Periodically there are declines. A bear market is characterized as a decline from the high of at least 20 percent. The media frequently mentioned that we have not been in a bear market since the bull market began in March 2009. You will likely recall that the S&P 500 lost roughly 37 percent of its value during the housing and financial crises in 2008-09. Here’s a list of the 10 most recent bear markets.
While we haven’t officially been in a bear market, I’m going to suggest that we were in a bear market starting in late 2011. The market had declined 19.39% from its highs. Okay, so that’s not technically a bear market, but for my thinking, that’s close enough.
No one can tell you where the market is heading tomorrow. People can, and will, try to predict the direction of the stock market. But most people have as much success at predicting the near-term direction of the stock market as a fortune teller has by looking into her crystal ball and predicting your future. I can’t predict the future, but I could easily see more volatility the rest of this year, especially given the presidential election in November. But for all I know, the rest of the year might remain flat, gain 10% or lose 10%. I don’t know. You don’t know. No one really knows. But I can tell you that if history proves accurate, over the long haul, the market averages will eventually rise. The best place for your money is in the stock market. You are investing for the long run. Your money is better off in the stock market than most anywhere else. Continue investing year in, year out. For your sanity, you might not want to check on your portfolio’s performance all that often. The dog has one of those extendable leashes and may run around a bit, but eventually the can opener will reign the dog in and we will all head up to the Metropolitan Museum of Art to enjoy some of those most beautiful art in the world.