๐Ÿ“ˆ TKer by Sam Ro

๐Ÿ“ˆ TKer by Sam Ro

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๐Ÿ“ˆ TKer by Sam Ro
๐Ÿ“ˆ TKer by Sam Ro
What just happened won't tell you what's coming next ๐Ÿงฎ
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What just happened won't tell you what's coming next ๐Ÿงฎ

Plus a review of the macro crosscurrents ๐Ÿ”€

Sam Ro, CFA's avatar
Sam Ro, CFA
Oct 16, 2022
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๐Ÿ“ˆ TKer by Sam Ro
๐Ÿ“ˆ TKer by Sam Ro
What just happened won't tell you what's coming next ๐Ÿงฎ
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Stocks ended another volatile week lower with the S&P 500 declining 1.6%. The index set a closing low of 3,577.03 on Wednesday and an intraday low of 3,491.58 on Thursday. From its January 3 closing high of 4,796.56, the S&P is now down 25.2%.

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It is incredibly difficult to predict where the stock market is headed in the short run.

And just because recent performance has been poor doesnโ€™t necessarily mean weโ€™re due for a quick, outsized rally. It doesnโ€™t necessarily mean that prices should tank further either.

โ€œThere is very little relationship between trailing returns and future returns,โ€ Craig Lazzara, managing director at S&P Dow Jones Indices, wrote on Wednesday.

Lazzara compiled and charted the historical data to argue his point

(Source: SPDJI)

โ€œThese data comprise every nine-month period since 1971, not just the January-September intervals; the exact correlation between the last nine monthsโ€™ returns and the next nine monthsโ€™ returns is 0.006,โ€ he wrote. โ€œA statisticianโ€™s best guess of the next nine monthsโ€™ returns would simply reflect the median return of the series, ignoring whatever the last nine monthsโ€™ returns had actually been.โ€

He added that โ€œthereโ€™s good news hiddenโ€ in that reality: โ€œThe market has no memory; the best guess of future returns does not depend on the immediate past.โ€

Itโ€™s important to note that this doesnโ€™t imply that itโ€™s a coin toss whether stocks go up or down at any given point in time. Lest we forget, the stock market usually goes up.

Lazzara broke up the dataset to to show the median returns over the next nine months by deciles based on trailing returns. As you can see, the median future returns are all significantly positive, ranging from 7.6% to 11.1% across the deciles.

(Source: SPDJI)

โ€œOver all nine-month periods in the last 50 years, the median return was 9.5%,โ€ Lazzara said. โ€œWhen historical returns were in the bottom decile, the median return in the next nine months was 10.8%, a not-inconsiderable improvement over the global median.โ€œ

Now itโ€™s at this point I have to remind you that you shouldnโ€™t expect average outcomes in the short run. Also, just because stocks usually go up doesnโ€™t mean stocks always go up.

However, these averages have historically materialized for long-term investors with the patience and stomach to ride the frequent ups and less frequent downs of the market.

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More from TKer:

  • The 'unwelcome' ascent of the U.S. dollar ๐Ÿ‘‘

  • A sneak preview of Wall Street's 2023 stock market forecasts ๐Ÿ”ญ

  • Most pros can't beat the market ๐ŸฅŠ

  • A time-tested way to buy stocks when the market is tumbling ๐Ÿ“‰

  • Bear markets and a truth about investing ๐Ÿป

  • Are 'gravity-defying' profit margins finally coming to an end? ๐Ÿ’ธ

  • Expectations for S&P 500 earnings are slipping ๐Ÿ“‰

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Reviewing the macro crosscurrents ๐Ÿ”€

There were a few notable data points from last week to consider:

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