Putting The Market into Perspective

September 1, 2015

There is an exhibit on the lower level of the Griffith Observatory known as the big picture. Along a very large wall, a team of scientists from Caltech, Yale, and Palomar Observatory has blown up a picture taken of space and mounted it to give visitors a glimpse of a sliver of the sky. When you stand back and gaze at the picture the number of stars and planets and galaxies is overwhelming, and yet the picture itself was taken of a section of the sky roughly the size of your thumb.

 

Last week was no doubt filled with volatility as the market rose and fell. In the midst of the chaos, it’s easy to get caught up in the dramatic headlines and glaring red and green numbers, but I often find that one of the easiest ways to calm the storm, is to put the numbers into perspective. To do that, I downloaded the opening and closing numbers for the S&P 500 from January 1, 1962, through August 26th of this year with the hopes that by looking at the big picture, I could give this week a little perspective. Here is what I found:

 In the last 53 years, there have been 46 days that the market has dropped between 3 – 4%, like it did this week. When the market gets jerky and takes these types of plunges, it’s important to ask yourself – why? Is there something going on in the world that justifies the declines? If there is, then it becomes worthwhile to find out how big of a deal that event is and is it something that will have a short-term effect or a long-term effect. Depending on your personal time horizon, the answers to these questions should help drive your decision-making. If there is no clear, valid reason as to why the market is falling, it may simply be that investors are spooked, and when that happens the market is likely to overshoot and then recover – similar to what happened in the latter half of this week. This next graph shows the percent of the time that the market had recovered by the end of the year for each segment of declines.

 You’ll notice that for the smaller declines, the market has recovered at least half of the time, if not more by the end of that year. You’ll also notice that in none of the segments did the market recover by year-end 100% of the time, and in some of the larger declines, it never recovered by year-end. Sometimes, sell-offs are justified based on what is going on in the world. Such was the case with the Tech bubble bursting in the early 2000s – companies simply weren’t worth what the stock market was saying they were worth and so prices corrected. However, over time, prices adjust until they do reflect what a company is worth, and if you add in inflation and technological progress, you find a market that has slowly and sometimes sporadically worked its way upward. This brings me to my final graph:

 This is a graph of the S&P 500 since January 1, 1950. While the last several decades have seen their fair share of ups and downs, the graph shows that over a long time horizon the market has historically trended upward. It may also be helpful to recognize that the double-digit returns that we have come to expect are a recent phenomenon. The S&P didn’t break into the triple digits until the mid-seventies, which is something to consider given that the market recently passed the 2000 mark. The market has come a long way since its inception and given innovations in different industries and globalization, it likely still has a ways to go, though maybe at a different pace than we’ve come to expect. This doesn’t mean the market will go up every year. As every financial disclosure reads – past performance is no guarantee of future results, and that remains the case. There will be down years and we should expect those years to be part of investing, but we should also be mindful not to get caught focusing in on a single day returns when making decisions.

 

While it’s impossible to predict the future of the market or what tomorrow will bring, I find it can be helpful in the midst of the day-to-day volatility to step back and see the big picture. It allows us to put things into perspective and hopefully prevents us from making irrational decisions in the heat of the moment that may play out poorly in the long run. If you’d like to speak with an advisor about your specific monetary needs and investing time horizons, please feel free to give us a call today. We’d be happy to talk through that decision with you in addition to building a free, custom financial plan.

 

"The Big Picture." The Griffith Observatory.  http://griffithobservatory.org/exhibits/guntherdepthsofspace_bigpicture.html

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