“Within our mandate, the ECB is willing to do whatever it
takes to preserve the euro and, believe me, it will be enough.”
--Mario
Draghi, European Central Bank (ECB) President
It’s quite amazing how one sentence from one man can help
spark a major rally in stocks, bonds, and the euro currency. Draghi’s comments
last Thursday in London represent a significant ramping up of the ECB’s
willingness to use its resources to hold the euro together and investors responded
enthusiastically. On the day of Draghi’s comments:
·
The euro and the British pound each
gained more than 1 percent against the U.S. dollar.
·
Stocks were positive in nearly all
European markets.
·
Italian and Spanish indexes each
jumped more than 5 percent.
·
The Spanish 10-year bond yield
dropped nearly half a percentage point from the day before and the 10-year
Italian bond yield was down a similar amount.
·
The S&P 500 index rallied 1.6
percent.
Sources: The Wall
Street Journal; CNBC
Between Draghi in Europe and Fed Chairman Ben Bernanke in
the U.S., central bankers seem to be exerting an outsized influence on the
markets. Normally, you expect markets to roughly trend with corporate earnings.
Speaking of earnings, several high-profile companies including Amazon, Facebook, and Starbucks, fell short on their second quarter earnings numbers released last week, according to CNBC. Overall, earnings for the companies reporting so far this quarter have been a bit on the light side, according to CNBC.
While earnings ultimately matter in the long run, today’s
markets seem focused on the support provided by central banks. And, yes, an up
market is an up market regardless of what’s propelling it. However, for
long-term sustainability, we need the markets to go up based on their earnings
growth – not artificial stimulus.
THE BEST AND THE WORST
DAYS IN THE STOCK MARKET tend to occur rather close to each
other and that has major implications for how to be a successful investor.
While it’s tempting to try to aggressively “time” the stock
market and be in on the best days and sitting in cash on the worst days, that’s
not a viable strategy. The chart below shows how just a few days each decade made
a profound impact on the performance of the market over that decade.
Decade
|
Annualized Return by
Decade
|
Return Excluding 10
Best Days
|
Return Excluding 20
Best Days
|
Return Excluding 30
Best Days
|
Return Excluding 40
Best Days
|
1970s
|
1.6%
|
-2.3%
|
-5.0%
|
-7.2%
|
-9.1%
|
1980s
|
12.6
|
7.6
|
4.6
|
2.0
|
-0.4
|
1990s
|
15.3
|
11.0
|
8.0
|
6.0
|
3.0
|
2000s
|
-2.7
|
-9.2
|
-13.2
|
-16.9
|
-19.5
|
Source: BMO Capital Markets
For example, during the 1980s, the S&P 500 had an average
annualized return of 12.6 percent. However, if you excluded the return of the
40 best days during that decade, then the return would have fallen to a
negative 0.4 percent. In other words, just 40 days out of that 10-year period
accounted for all of the return for the decade. Wow!
Now, you also have to know that missing the 40 worst
days during the decade would have a profound positive impact on your
performance. But, here’s the rub – it would take perfect foresight to know in
advance when these 40 best and worst days would occur. And, of course, none of
us have that.
What makes aggressive timing even more difficult is that
these best and worst days often happen pretty close to each other. BMO Capital
Markets discovered that since 1970, more than 50 percent of the 40 best days
occurred within two weeks of one of the 40 worst days! So, imagine this… the
stock market has one of its worst 40 days for the decade and you are lucky
enough to be sitting 100 percent in cash that day. Now, realistically, after a
big drop like that, are you going to have the nerve to jump 100 percent right
back in? If you didn’t, you’d miss more than half of the 40 biggest up days
since those big up days often occur within two weeks of a big down day.
The lesson here is simple. Markets are volatile and the
price of long-term return is enduring the pain of periodic declines.
Weekly Focus – Think About It…
“The most important thing in the Olympic Games is not
winning, but taking part; the essential thing in life is not conquering, but
fighting well.”
--Pierre de Coubertin, founder of the modern Olympic Games
No comments:
Post a Comment