You Are Owed Nothing

People invest their hard earned dollars to earn a return above and beyond inflation.  At a three percent inflation rate, your purchasing power would get cut in half over twenty years. As the value of your dollar diminishes over time, the goal when investing is to maintain and even grow the value of your money.

You’ve seen this chart before, it shows that $1 invested in 1926 would have grown to $5,386 today, a whopping return of 538,547%, or 10% a year.


What you don’t always see is the real growth of $1, or what the returns would be after you factor in inflation. Once this is accounted for, stocks have returned 40,670% over the last ninety years, or 6.9% a year (I used an arithmetic scale here for affect, the chart above uses a log scale).

growth 2.jpg

The chart above clearly demonstrates how much inflation eats into returns. Still, an 8.5% average real return, or 6.9% compounded is pretty darn good. If an investor earned 6.9% for twenty years, their total return would be 280%. Sounds good right? Here’s the kicker. Real returns aren’t owed to anybody, they’re earned the hard way.

Over all ten-year periods, the real rate of return for stocks has been positive 85% of the time. While these are pretty good odds, you probably wouldn’t feel invincible if somebody told you there was a 15% chance that you could lose money investing over the next decade. The image below illustrates that investing is not for the faint of heart.

cap 3

As you’re probably painfully aware, the S&P 500 hasn’t made any progress over the last two years. If you’re feeling a little frustrated, I have some bad news for you, this is how stocks work. The stock market doesn’t owe you anything. It doesn’t care that you’re about to retire. It doesn’t care that you’re funding your child’s education. It doesn’t care about your wants and needs or your hopes and dreams.

I absolutely believe that stocks are the best game in town. I don’t think there is a better way for the average investor to grow their wealth. However, this is called investing and the price of admission is gut wrenching drawdowns and sometimes years and years with nothing to show for it. If you can accept that this is the way things work, you can be an enormously successful investor.


“One day it started raining, and it didn’t quit for four months” Forrest Gump

What’s especially frustrating right now, besides the fact that the S&P 500 is now in a 13.2% drawdown, is that we’re not seeing any sense of panic. While every bounce attempt is getting smaller in both size and duration, the market has yet to do the proverbial flush that we all seam to be waiting for. The “all clear” moment, if you will.

The last time stocks were selling off like this was the summer of 2011 when the S&P 500 fell 21.58% peak to trough. But do not, I repeat do not call this a bear market, because using closing prices it “only” fell 19.39%. GMAFB. Anyway, that episode did end in the type of “get me out” selling. In the chart below, SPY is shown in gray while the blue line represents the daily volume divided by the 30-day average volume. You can see that the spike in coincided not exactly at the bottom, but pretty darn close. The volume was more than twice as much as the 30-day average for five days in a row and believe it or not, this is the only time this ever happened.


Right now on the other hand, we’re seeing zero signs of capitulation. Again, SPY on the left axis, volume relative to 30 day volume on the right.


Maybe we will get the flush or maybe we won’t. Maybe we get a flush, consolidation, then more flushing. Who knows? There is no formula for markets like this, which is what makes it so fascinating to watch. In the short term, fundamentals mean literally nothing and lines in the sand are drawn and erased daily. Psychology takes over and selling begets more selling until….”and then just like that, somebody turned off the rain and the sun came out.”

A Gift From God

The S&P 500 closed at a 52-week low on January 20th for the first time since 2011. Last week I took a look at how stocks did in the year they made a 52-week low. Maybe not surprisingly, they performed significantly worse in the years when a 52-week closing low occurred, returning -10% on average, versus 18% for all years that didn’t experience this. Today, I’m going a step further to examine how stocks performed in the one and three years following a 52-week closing low.

When looking out only one year, it’s almost always impossible to say anything conclusive. and this exercise is no exception. With that said, here are a few observations.

  • Stocks have historically not been any more likely to be positive one year after they’ve made a 52-week closing low. However, when stocks were positive one year later, the average change was 24%, significantly higher than all periods.
  • Following the previous statement, after closing at a 52-week low, stocks were more likely to have an outsized move a year later. For all one-year periods, stocks closed either +/- double-digits 65% of the time. One year after a 52-week closing low, stocks had a double-digit change 75% of the time. Grab your popcorn.

Contrary to what our stomach would have us believe, stocks actually get less risky as they decline. For long-term investors that are working and buying stocks every two weeks, these declines should be thought of as “a gift from god” (H/T Nick Murray).

I usually stay pretty far away from predictions, but here’s something I feel 86% certain about; stocks will be higher three years from now. That’s what has happened historically following a 52-week closing low, so I’m going to go with that. I’m also 74% certain that the S&P 500 won’t be more than 10% lower than the recent 52-week closing low one year from now. If you want to hold my feet to the fire, that’s 1,673 to be exact. What’s giving me the confidence to say that? Of the 427 52-week closing lows since the late 1920s, stocks were 10% lower one year later just 24% of the time. Furthermore, the last few times stocks were 10% lower one year after making a 52-week closing low were 1973, 1974, 2000, 2001, 2008. Unfortunately, we can’t rule out the possibility that this turns into one of those markets, especially if you look at the way banks- in particular European ones- are behaving.

The more research I do into market history, the more I realize that all bets are off, especially when you’re talking about a twelve-month period. It’s scary to come to this realization but the fact of the matter is we have no idea what the future holds. While it’s true that stocks have been higher three years after a 52-week low 86% of the time, there is simply no way of knowing if we’re currently in the 14%. Because of the permanent uncertainty in markets, it’s so important to have an investment plan in place. Market returns are beyond our control, but having an answer to all environments, even if that answer doesn’t immediately yield positive returns, is a very liberating feeling.

History Was Made

What a day…

There was crazy strength out of the cyclical names today. XLB rose 3.3%, XLE rose 3.5% and XLI rose 1.6%. Meanwhile, XLK fell 0.1% and XLY fell 0.2%. These five things has never occurred simultaneously. The data for this goes back to 1998.

The S&P 500 rose 0.49%, the Dow rose 1.1% the NASDAQ 100 fell 0.50%. This has happened only once in the last five years and 22 times since 1985. 12 of those times were between 1999 and 2002.

Google fell 4%, Netflix fell 0.8%, Amazon fell 3.8% and Facebook fell 1.6%. Today was the first time this has ever happened while the S&P 500 finished green.

Crude Oil rose 13.9%, its biggest move since January 2009 and the seventh biggest move since 1983.

At one point, financials were down 2.8% early in the day, they managed to finish green. This has only happened four times over the last five years.

The U.S. dollar fell 1.6%, its fourth biggest drop over the past 5 years.

Tomorrow should be interesting….

Bad Markets and 52-Week Lows

The S&P 500 just closed at a 52-week low (January 20) for the first time since October 2011. The 1079 days between 52-week closing lows is the fourth longest streak of all time.

I went back and looked at what happened in years that experienced a closing low versus those that didn’t and the results were pretty interesting.

A few observations:

  • Of the 37 years that experienced a 52-week closing low, the average return was -10%. Of the 49 years that did not experience a 52-week closing low, the average return was 18%.
  • 35% of all years have had negative returns. At 70%, years that saw a 52-week closing low were twice as likely to finish in the red.
  • 2% of all days have closed at 52-week lows.
  • 1974 had 38 different 52-week closing lows, the most of any year. 2008 had 27, for comparison.
  • Just because we recently had a 52-week closing low, does not mean you should run and dump all your stocks. On five different occasions did a year see a 52-week closing low and still finish up double digits.

I’m sure I’ll get a lot of “no shit Sherlock” for this, but to keep it simple, the takeaway is that bad things tend to happen in bad markets.