Markets, Economy

Weekly Kickstart (06/22/2020-06/26/2020)

6/22/20 8:00 AM

iStock-626627280.jpgStocks continued higher last week, as the S&P 500 rose by 1.86 percent to 3,097.74. That left the benchmark index down just 4.12 percent 2020-to-date, and 8.52 percent below the record close. Perhaps more important is that compared to this same period last year the S&P 500 is up 5.85 percent, and the returns look even better over longer time horizons. This suggests that as scary as the market tumult might have been earlier this year, one of the best things an investor could have done was refrain from making panic trading decisions. It is of course not always easy to remain calm while markets are tumbling, especially if your equity allocation is higher than what is appropriate for your nearness to retirement and risk tolerance, but this is why we have regularly highlighted a J.P. Morgan analysis which showed how “time in the market” can often outperform trying to “time the market.” Specifically, missing just the 10 best performing days for stocks since 2000 would generate less than a third of the gain that could have resulted from staying invested throughout the roughly 20-year sample period, and missing only 60 of the “best days” would actually end in a 77 percent loss.


A common critique of these best days statistics is that returns would be as good or even better if one instead missed the “worst days,” i.e. the largest daily declines in the S&P 500. The J.P. Morgan researchers recently updated their analysis and found that missing the worst performing days would indeed generate similarly impressive returns. However, the key issue that the best days critics overlook is that to avoid missing the best days all an investor has to do is nothing (stay invested). Missing the worst days, though, would require perfect market timing that even the most revered hedge fund managers would struggle to replicate, e.g. selling right before a “worst day” and then immediately putting all your long positions back on in time to benefit from the best days, which often occur in very close proximity to the worst days. It also does not help that apart from needing market clairvoyance, trying to miss the worst days would generate more trading (transaction) costs than simply staying invested to benefit from the best days. As the J.P. Morgan researchers summarized, “It is impossible to believe that someone could be smart enough to consistently miss the worst days and have the courage to invest in time to benefit from the best days. … Overall, the worst and best market days are just like rain and rainbows. Generally a rainbow appears only after a thunderstorm. While intentions to miss the rain are valid, we will likely miss the rainbow that follows.”


To recap a few of the things we learned about the economy last week, the positives included that mortgage purchase applications rose for the 9th straight week, homebuilder confidence jumped, business activity rebounded, industrial production stabilized, and retail sales surged. As for the negatives, capacity utilization slid, housing starts disappointed forecasts, and initial jobless claims declined at a slower rate. This week the pace of data picks up slightly with a few important reports on housing, manufacturing, employment, consumers, and inflation scheduled to be released.


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Sources: Econoday, J.P. Morgan, FRBSL

Post author: Charles Couch