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Market Update: Avoid the Noise and “Tilt”

I’m sure you saw all the headlines yesterday about the market.

DOW downfall iphone CNBC Markets in Turmoil

The media is obsessed with hysteria and trying to get viewers, readers, and followers. The question you need to constantly ask yourself is:

“Is this noise or is this evidence?”

In the last 2 days the SP500 has dropped -2.1% followed by a -4.1% drop yesterday. Two back to back days like this is pretty rare. Since the 1960’s, double dipping has happened less than 1% of the market’s total lifetime. The last 2 twice-occurring drops were August 2015 and in November 2011. These were rare, but still memorable.

To put this into perspective, the SP500 is now at prices we last saw in mid-December 2017- all of 8 weeks ago. The SP500 is still up 17% over the past year. The market is now -6.2% below its close on Jan 31, 2018. This recent drop is not a big drop in magnitude, it just happened fast enough to make an emotional impact.

After a year of unprecedented market growth (12 straight months of market gains) with the DOW never before reaching 25,000 and the S&P 500 reaching over 2,700, we are now seeing volatility creep back into the system. Yes, the DOW did have its largest one-day point drop in history. However, it was only a 4.26% drop in one day – not the biggest percentage drop in history.

Evidence, Noise, and Tilt

This is the EVIDENCE.

Pay no attention to the NOISE generated by the media and pundits whose jobs are to get more viewers, reactions, “likes,” and “followers.” You know better, pay attention to the evidence and the confidence of how you are invested using diversification and trend following strategies.

Poker uses the term “TILT” when your position at the table is either down a majority of chips or you’re stacked. Tilt breeds emotion and good decisions are rarely made using emotion instead of evidence. Investing is much the same way. When the market starts to tilt one way or the other we get emotional about our money.

Negative tilt, even a little bit like we’ve seen the past couple days, can cause panic and irrational thinking. Positive tilt, like we’ve seen over the past year can create overconfidence (see bitcoin) and cause more risky decisions.

At Jarred Bunch, we’ve always used evidence and rules-based strategies that avoid “tilt.” Our educational philosophy has always been to seek the evidence and avoid media-fueled noise.

Want more evidence?

The reality is that the market is in a drawdown more than not, in fact 70% of the time (historically) is spent in a drawdown. Ben Carlson recently wrote about Robert Frey’s video “180 Years of Market Drawdowns” and showed some context to this with the following chart:

historical market drawdowns

Carlson further went on to analyze monthly drawdowns to see the size of the loss:

tabulated market drawdowns 1927-2016

He states, “Over the last 90 years or so the market has been in a bear market almost one-quarter of the time. Half the time you’re down 5% or worse. It’s difficult to appreciate this fact when looking at a long-term log scale stock chart that seems to only go up and to the right. This is why stocks are constantly playing mind games with us. They generally go up but not every day, week, month or year.”

What’s the Payoff?

The payoff by sticking with your investment plan is that, over time, the market trends upward. The 10-year S&P 500 is up 142%, for an annualized return of 9.26%. It’s the gyrations in-between that become noise and detract us from our goals.

Looking at rolling returns we get a great picture of how the stock market performs over good and bad times. Over short periods the market can deliver exceptionally high or exceptionally low returns. Over time this fluctuation smooths out with a worst 20-year period delivering a return of 6.4% per year and the best returned 18% per year. See the chart below provided by Dana Anspach’s research.

SP 500 Index Rolling Returns chart

What we do know about the market is it will continue to fluctuate and experience losses on a regular basis. How we as investors use this evidence to stick with our investment strategies is the key decider to our long-term success.