Only a Market of Stocks

It’s hard to believe that the S&P 500 has been within 5% of its all-time high for the last 284 trading days, going all the way back to June, 2016. It would surprise no one if that streak ended sooner, rather than later.

On Friday, The S&P 500 closed 1.99% below its all-time high. The S&P 500 equal weight is 2.73% off its high, and the small stocks, the Russell 2000, is 5.36% off its high. But stock pickers and newsletter writers will say that just looking at the index fails to tell the whole story. Fair enough. Let’s look a little bit closer.

The average Russell 2000 stock is already in a bear market, falling 22.42% from its 52-week high. However, since there are no positive numbers when looking at “percent from 52-week high,” and because there are so many outliers- 38 stocks are in a 70% drawdown- I prefer to use the median when doing this sort of analysis. The median tells a similar, but more accurate story.

The median Russell 2000 stock is 17.38% from its 52-week high. Likewise, the average and median S&P 500 stock are 8.04% and 11.77% from their 52-week highs. Are these scary numbers? Do they foreshadow something ominous on the horizon? Maybe, but nobody can know with certainty.

What if I were to tell you that median and average Russell 2000 stock are 29.55% and 51.85% above their 52-week lows, or that the median and average S&P 500 stock are 24.16 and 27.16% higher than their 52-week lows? Doesn’t this type of advance make a potential decline less worrisome? I suppose the answer to that depends on what type of investor you are, and whether your last purchase was closer to the 52-week low or the 52-week high.

So how should we think about the market of stocks? In a 1963 lecture, Ben Graham commented on this:

There is no real “stock market”, but only, as the Wall Street people like to say, “only a market of stocks”–deserves a moment or two of discussion. What they mean by saying this is that investment results depend only what happen to individual securities, some of which will go up and others down, and that it is illusory to talk about what happens to the market as a whole as having a major ground on how the investor fares. I disagree with that view point on three grounds.

Read the lecture if you want to see the first two points, but here is the third point, which he calls the most important one:

There is no indication that the investor can do better than the market averages by making his own selections or by taking expert advice. The outstanding support for that pessimistic statement is found in the record of investment funds, which represent a combination of about the best financial brains in the country, and a tremendous expenditure, of money, time, and carefully directed effort. The record shows that the funds have had great difficulty as a whole in equalling the 30 stocks in the Dow Jones Averages or the 500 Standard & Poor’s index.

On average, investors, whether picking stocks or picking ETFs or mutual funds, should expect to do no better than the market itself. This is not news to anyone, and despite the fact that beating the market has been difficult since the beginning of markets, this has not failed to stop us from trying. But back to today…

…I’m definitely not suggesting that the current stock market should be viewed with rose-tinted glasses. I would agree that there are things going on that the index fails to make clear. For example, NYSE new highs minus new lows hit a level on Friday not seen since the day the market bottomed, in February 2016. The leadership stocks, Amazon in particular, are looking particularly vulnerable. But to what exactly? Falling 30% from its all time high to a gain of just 1% on the year? Giving long-term investors a better entry? Giving back some of the 223% it has gained over the last two years?

The real question is not whether the index accurately represents what’s going on, but rather, does paying such close attention to what’s happening under the surface give us any insight into the future?

We saw a similar deterioration with individual stocks from May 2015 to February 2016. The S&P 500 index only fell 15% peak-to-trough, and plenty of individual stocks got hit a lot harder. But then, those paying attention to individual names rung the bell just before the bottom, and we all levered up and lived happily ever after. All kidding aside, here’s what matters: how you respond to the decline, if there is one, is more important than whether it stops at minus five, ten, or twenty percent. We can’t predict where stocks go, but as Jason Zweig said, we must learn to control and predict our own behavior. Obsessing over the fact that some stocks are doing worse than the overall market will likely lead to worse, not better behavior.


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