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Market Perspective - January 2019


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Market Perspective - January 2019

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Market Perspective - January 2019

  1. 1. Market Perspective – January 2019 Experience Insight Impact Overview: As subscribers to a data-driven approach to investing, we relish the opportunity to review economics, earnings, and general market information in order to form long-term investment views and portfolio allocations for clients. Global markets sometimes ignore data, however, and express the behavior of living beings. This is due to powerful forces embedded in the concept of “behavioral finance.” Humans, with emotions and sporadic illogical behaviors, are continuously influencing markets (although perhaps less so today than in the past). This allows many market anomalies to take hold and perpetuate the belief that they are in force. This month, we reintroduce several previous slides to review this concept in light of the sharp decline and recovery experienced in markets over the past few months. 1
  2. 2. Behavioral Finance Experience Insight Impact Source: What is Behavioral Finance? Behavioral finance, a sub-field of behavioral economics, proposes psychology-based theories to explain stock market anomalies, such as severe rises or falls in stock price. The purpose is to identify and understand the reasons people make certain financial choices. Within behavioral finance, it is assumed that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes. There are several main aspects of behavioral finance but here, we will focus on a select few of them. 2
  3. 3. Herd Behavior Experience Insight Impact Herd Behavior is the tendency for individuals to mimic the actions of a larger group. This generally occurs because there is a strong pressure in society to conform. Another major factor is the false view that the more people buy into a decision, the more likely it is to be correct. Source: Franklin Templeton, Tulipmania Dec. 1634 - May 1637: Thompson, Earl A. “The tulipmania: Fact or Artifact?” Public Choice, 2007; Roaring ‘20s Dec. 1924 - Nov. 1929: Dow Jones Industrial Average; Dot-Com Jan. 1997 - Oct. 2002: NASDAQ Index; Real Estate Jan. 2002 - Mar. 2012: Case-Shiller Housing Index., • “I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.” - Warren Buffett • “As contrarians, the only thing to fear is the lack of fear itself.” - Bernie Schaeffer How to Avoid Herd Behavior: • Know YOUR position and views. • Get comfortable being in conflict. • Disagree before you agree. 3
  4. 4. Anchoring Experience Insight Impact Anchoring is a concept in the investment world in which investors may base their decision making on irrelevant numbers and statistics, such as a large price drop in a stock. The investor would “anchor” on the recent highs, believing that a stock simply being down is a reason to buy, when in fact there are likely many circumstances surrounding the drop in price (customer loss, management change, etc.). Source:, Charles Schwab % Co. Tools to Avoid Anchoring: • Acknowledge Bias: Look forward and accept that the past is history. • Set Independent Anchor: Establish a new anchor and set parameters in advance when possible, while allowing flexibility in the approach. • Consider History: Use history as a guide and tailor up or down based on independent research. • Take Advantage of Objective Resources: Thorough research using expert views can help mitigate. 4
  5. 5. January Effect Experience Insight Impact The January Effect is a seasonal increase in stock prices during the month of January. 5
  6. 6. January Effect: Recent Performance Experience Insight Impact However, recent S&P 500 performance during the month of January has been mixed, especially since the crisis in 2008. January 2015 and January 2016 also produced losses in excess of 3%. January 2018 and year-to-date 2019 returned greater than 5%. In reality, this trading strategy has been inconsistent over time. Source: CNBC 6
  7. 7. January Barometer Experience Insight Impact Another market legend is that January’s return predicts the direction of the stock market for the whole year. The above scatterplot of Full Year Return vs. January Return shows some evidence of a predictive nature. 7
  8. 8. January Barometer: Recent Evidence Experience Insight Impact However, the recent track record for the January Barometer has been poor. Trading based on the January Barometer would have led to missing out on some of the greatest rallies after the Great Financial Crisis of 2008. It is frequently pointed out that correlation is not the same as causation. +15.8% +5.5% -37.0% +26.5% +15.1% +2.1% +16.0% +32.4% +13.7% +1.4% +12.0% S&P 500 Return Source: Business Insider, Wolf Street 8
  9. 9. Sell in May and Go Away Experience Insight Impact Returns during the cooler months significantly outpaced returns during the warmer months. Since 1928, $100 invested in the S&P 500 during the November through April period would now be worth $4,270. However, $100 invested during the May through October period would only be worth $257. The trend is similar over the last 50 years ($2,136 for November-April vs $139 for May- October) and over the last 20 years ($343 for November-April vs $98.50 for May-October). Source: Factset Source: Investment U 9
  10. 10. Sell in May and Go Away: Reality Experience Insight Impact • Despite the striking statistics behind the phrase “Sell in May and Go Away,” a portfolio reflecting these actions did not outperform the simple buy-and-hold portfolio over the long-term. • We would also point out that there have been numerous times where this has not worked. For example, in 2009, investors would have missed out on 20.5% in gains (excluding dividends) had they not been invested during the warmer months. • There is also an element of randomness to the exact timing, which presents the distinct possibility of data mining. Source: CXO Advisory Group, Forbes 10
  11. 11. Market Perspective – January 2019 Experience Insight Impact Conclusion: Many investors today lament the rise of machines in the investing world. While this may be the case, the human element of investing is still very much in play. While some may rely on old “rule of thumb” examples of how to trade and invest, deep due diligence and research remain essential (as does a long-term view). Acknowledging the imperfections of human nature will give investors a leg up and reduce the inevitable challenges presented in behavioral investing. 11
  12. 12. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 12