Despite Investor Fears, The Market Stands Its Ground
It seems like anyone old enough to remember the 2008 crash is decidedly bearish and absolutely convinced that the next crash is just moments from impact. Of course they’ll be right at some point, likely early next year. The market has a couple of things going for it, one big aspect being disbelief, and that markets never crash when everybody expects them to.
The worries for the market are almost endless with the impending doom of the fiscal cliff, poor third quarter earnings, Europe in a recession, and China and emerging markets slowing fast, but these are known. For now, the market will climb the proverbial wall of worry, with a friendly cycle or two on its side. Not to mention of course, the unprecedented government stimulus among us.
My friend John Thomas, The Mad Hedge Fund Trader did a study on the “sell in May and go away” phenomenon and points out that according to the data in the Stock Trader’s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today. Amazingly, $10,000 invested on every November 1st and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10%. In fact, since 2000, the Dow has managed a feeble return of only 4%, while the long winter/short summer strategy generated a stunning 64%.
Of the 62 years under study, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years! There have been just three times when the “good 6 months” have lost more than 10% (1969, 1973 and 2008), but with the “bad six month” time period there have been 11 losing efforts of 10% or more. With November 1st only two weeks away, this is definitely food for thought. However, be aware that typically once a trend is discovered, it usually stops working.
Another set of statistics may surprise you. Since 1987, stocks have staged a big run from the October lows to the December’s high. The S&P 500, over this twenty four year period study, had an average gain of +10%, ranging from a low of 1% to a gain of 29% with the NASDAQ and Russell 2000 doing even better with a gain of almost 15% and 12% respectively.
That said, this year so far has been very different from historical averages in looking at the behavior of the S&P 500. Since 1949, the first and third quarters are weak (small gains of 0.7% and 0.6% respectively), while second and fourth quarters are the strongest with each gaining 2.1%. In 2012, it has been just the reverse: Q1 and Q3 were the big gainers, 12.0% and 5.8%, while Q2 posted a loss of-3.3%. As I said above, typically once a trend is discovered, it usually stops working.
In the bigger picture, the natural demographic trends of the largest generation in history moving past their peak spending years can only be met with slower growth and higher unemployment and deflation, which I discuss in depth in Facing Goliath – How to Triumph in the Dangerous Market Ahead. Not until the echo-boomers, the 90 million kids of the baby boomers, start spending in about 5 years will the economy fully recover and start growing again. Hallelujah for federal stimulus, while it lasts.
Although the stock market is a dangerous place long term, there is money to be made in the shorter. Therefore, investors should participate depending on their risk levels. Those who do not need all of the risk of the market simply should not take it. When the roof caves in, it will be at light speed. Stick with the proper investments that meet your needs not your greed!
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