What just happened won't tell you what's coming next 🧮
Plus a review of the macro crosscurrents 🔀
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 doesn’t necessarily mean we’re due for a quick, outsized rally. It doesn’t necessarily mean that prices should tank further either.
“There is very little relationship between trailing returns and future returns,” Craig Lazzara, managing director at S&P Dow Jones Indices, wrote on Wednesday.
Lazzara compiled and charted the historical data to argue his point
“These data comprise every nine-month period since 1971, not just the January-September intervals; the exact correlation between the last nine months’ returns and the next nine months’ returns is 0.006,” he wrote. “A statistician’s best guess of the next nine months’ returns would simply reflect the median return of the series, ignoring whatever the last nine months’ returns had actually been.”
He added that “there’s good news hidden” in that reality: “The market has no memory; the best guess of future returns does not depend on the immediate past.”
It’s important to note that this doesn’t imply that it’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.
“Over all nine-month periods in the last 50 years, the median return was 9.5%,” Lazzara said. “When 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.“
Now it’s at this point I have to remind you that you shouldn’t expect average outcomes in the short run. Also, just because stocks usually go up doesn’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:
A sneak preview of Wall Street's 2023 stock market forecasts 🔭
A time-tested way to buy stocks when the market is tumbling 📉
Are 'gravity-defying' profit margins finally coming to an end? 💸
Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
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