Author: Tim Courtney
By Tim Courtney, Chief Investment Officer
The market has been unusually quiet. In fact, up until Jan. 27, it hadn’t moved 1% or more since mid-October, marking the sixth-longest quiet streak in the last 50 years.1 Since Jan. 27, we have had four more days of greater than + or- 1% moves.
Until the Coronavirus began making news, the market was content with low interest rates around the globe as well as the continued prospect of improving international trade relations.2
On top of the calm, we are also experiencing the longest period of economic expansion in U.S. history, which is sparking much debate about when the next recession will begin.3
Based on an assessment of current market conditions and economic indicators, we do not believe a recession is likely for 2020. However, we should be prepared for more noisy markets – drops between 5% and 10% - and potentially corrections, in which the market would decline 10% or more.4
Within bull markets, pullbacks and corrections are normal. Corrections of 10% or more are usually experienced every year to year-and-a-half.1
This then begs the question – if we are likely to experience a correction, or at least a pullback in the next year, why not exit the market to avoid potential losses and protect our gains?
While it seems straight-forward to cash out before the low point of a downturn, timing the market is much more complicated to execute effectively.
We regularly update an internal study involving a timing strategy.5 This hypothetical timing strategy promises that the investor will be sold out of the market during any market decline of 4% or more so that their loss is only half that of the market decline. Additionally, the investor will buy back into the market 10 business days after the market bottoms. We thought this strategy would sound like an attractive tradeoff to many investors, even if the actual execution of it is not practicable.
We simulated this strategy using the S&P 500 Index since the beginning of this bull market in 2009 and compared the results against a buy-and-hold strategy that was always invested and fully experienced any downturns. Unfortunately for our hypothetical timing strategy, the always-invested strategy is far ahead as of the end of 2019.5 The ending value of the S&P 500 Index as of Dec. 31, 2019 was 347,684, whereas the ending value of the timing strategy was 246,402. Additionally, out of the 26 declines analyzed, the timing strategy only “worked” six times.
We found that, for the timing strategy to work, investors’ timing back into markets would have to be within two weeks of market bottoms. This is such a narrow time frame that there is virtually no chance of an investor being able to do it with any kind of consistency. And once returns have started to be missed, the foregone growth loses out on compounding over time.
So while the quiet market of 2019 may turn more volatile in 2020 and we may experience more downturns this year, we think remaining invested in productive companies across the world will almost certainly yield better results than trying to maneuver in and out of markets through very narrow windows of time.
1. Yahoo! Finance
– S&P 500
2. NBCNews.com – What's ahead for the economy and markets in 2020?
3. Forbes – Longest economic expansion in United States history
4. MarketWatch – The difference between a correction and a bear market — and 5 other financial terms to know for 2019
5. Exencial study – Based on S&P 500 Index daily closing pricing data from Yahoo! Finance
PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information
and opinions provided herein reflect the views of the author as of the
publication date of this article. Such views and opinions are subject to
change at any point and without notice. Some of the information provided
herein was obtained from third-party sources believed to be reliable but such
information is not guaranteed to be accurate. In addition, the links provided
within are for convenience only and the provision of the links does not imply
any sponsorship, endorsement, or approval of any of the content. We do not
guarantee the content or its accuracy and completeness. The content is being
provided for informational purposes only, and nothing within is, or is
intended to constitute, investment, tax, or legal advice or a recommendation
to buy or sell any types of securities or investments. The author has not
taken into account the investment objectives, financial situation, or
particular needs of any individual investor. Any forward-looking statements
or forecasts are based on assumptions only, and actual results are expected
to vary from any such statements or forecasts. No reliance should be placed
on any such statements or forecasts when making any investment decision. Any
assumptions and projections displayed are estimates, hypothetical in nature,
and meant to serve solely as a guideline. No investment decision should be
made based solely on any information provided herein and the author is not
responsible for the consequences of any decisions or actions taken as a
result of information provided in this book. There is a risk of loss from an
investment in securities, including the risk of total loss of principal,
which an investor will need to be prepared to bear. Different types of investments
involve varying degrees of risk, and there can be no assurance that any
specific investment will be profitable or suitable for a particular
investor’s financial situation or risk tolerance. Exencial Wealth Advisors,
LLC (“EWA”) is an investment adviser registered with the Securities &
Exchange Commission (SEC). However, such registration does not imply a
certain level of skill or training and no inference to the contrary should be
made. EWA may only transact business in those states in which it is registered,
notice filed, or qualifies for an exemption or exclusion from registration or
notice filing requirements. Complete information about our services and fees
is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which
can be obtained at www.adviserinfo.sec.gov
or by calling us at 888-478-1971