A Few Charts And A Few Thoughts

Stocks gained 6% in the first 22 sessions of 2018. In the last two, they gave it all back, and then some. This is what Aristotle meant when he said “stocks take the stairs up and the elevator down.”

The simplest explanation for the way markets move is this: Rising prices attract buyers and falling prices attract sellers. The thing is, they do so in a very different manner, with stocks acting one way in January and an entirely different way in February.

The Dow fell 4.6% today, which is the largest daily decline since August 2011, 1632 days ago. The culprit back then was the European debt crisis. Today, it’s a combination of a lot of things, with rising rates being the main culprit, I guess. But the one thing we can say with absolute certainty on a day like today is that buyers were completely overwhelmed by sellers.

The reason why declines happen so much faster than the advances is because fear spreads much quicker than greed. The chart below of the VIX is a good way to illustrate what happens when someone screams fire in a crowded theater.

Going back to 1926, stocks have outperformed one-month T-Bills by 8.9% a year, but this was before inflation, before fees, before index funds, and most importantly, before human behavior.

In order to earn these returns, investors have to pay the piper from time to time, and I’d say the Dow falling as much as 1500 points in a single day fits the bill. Nobody knows if that was the top, but for those of us looking to capture whatever long-term returns stocks will deliver, you have to be long at the top to be long at the bottom.

 

 

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