We all like to look backwards and talk about all the things we should have, could have or might have done… if only we knew how everything would end up. This is one of the great challenges of investment decisions. I believe that by studying history we can make decisions that are least likely to push us to make the worst mistakes; the kind that hurt us financially for years afterwards.
By looking back through history we can track investor behavior. Those responses to market moves do tend to repeat. For example, when the market is “expensive” and the Fed is hiking rates, by the time we get to the 6th, 7th or 8th consecutive rate hike, the market sentiment becomes worried that the Fed has gone too far and will push the economy into recession.
Let’s take a walk down memory lane and consider the market in August 2015. Fears during that period are similar to current day (not the same). Including worries over China and the Fed removing their extra-normal accommodation to the markets. Or how the markets fell 12% and remained in a volatile trading range from August 25, 2015 to September 29, 2015 before a nearly 100% recovery by the end of October.
If you had sold out sometime in early September after your August statement showed up, you probably felt sad, perhaps even desperately wanting to go back into the now “recovered market.” After all, the S&P 500, which had dropped below the 200-day moving average, was now above it. In fact, those investors who did this went on to promptly lose another nearly 12%.
So that brings us to today. We had an astounding decline in the markets in December 2018 with the S&P 500 falling nearly 10% for the month. We have had an equally astounding recovery in January and February. The reasons the market plummeted in 2018 are not 100% dealt with, but they have improved greatly.
China/US trade is not yet resolved even though the Fed has been indicating that they are likely to pause as long as necessary for the economy. However, we also have seen some signs of economic weakening, even though it doesn’t look like enough to cause us to worry about recession at this point. There may also be some surprise if we did not see a meaningful pullback sometime in the next few months.
To better illustrate the rhythm and rhyming of the markets, the chart below illustrates the S&P 500 as of Friday mid-day (2/22/2019). We are still about 8% below the high from last September, and we have just peaked above the 200-day moving average (like October 2015).
Not every single correction is the same. In the middle of a correction we must be careful to remain calm and not go too far in beating ourselves up for past decisions. The big issue is not so much what happened yesterday, but what does yesterday mean for tomorrow. That sounds very philosophical and wise, but it is nearly never that easy in practice. History never repeats itself. It only rhymes sometimes.
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