Stefan’s weekly: When are (Equity) Markets finally going to crash?

I have the impression the media and even many members of the financial industry are hoping for (equity) markets to crash. This may seem a little strange, but so many were wrong during the last 12 months, predicting bad- and worst-case scenarios and now they are hoping to finally be right with their poor predictions.

First, not all markets were going up and within the ones that went up there were large differences and sometimes with very high volatility. The best example for this is probably the rise of crypto currencies from something hardly known to something that made owners rich. As a more traditional investor, today I am looking at equities markets and within those, I like to look at the ones that offer statistical data for as many decades as possible.

Now, for this reason I am looking at the S&P 500, certainly one of the leading global indices. One can see that in 2017 this very index closed not once below the 200 day moving average line (an indicator to determine a stock’s or index’s closing average over a period of 200 consecutive days). This is rare and only happened 14 times in the past 90 years.

The interesting question is what happened in the year after such rare events. Well, in 54% of observations the market went up. The average performance in the following year was close to 2%. This of course does not mean much but maybe if narrow it down just a little more, because in 2017 we didn’t see any drawdown larger than 5% and this, Ladies and Gentlemen, only happened seven times in the past 90 years.

Again, it is interesting to look what happened in the 7 years thereafter. Two thirds of all observations showed a positive year following a year with intra year drawdowns of below 5%. The average performance in the seven years that followed years with maximum drawdowns of 5% stood at +8.5%. However, don’t get the champagne out just yet, because in those years volatility went up quite a bit and intra year drawdowns so far always came to stand at over 5%.

What does this small statistical exercise tell us? It tells us that purely statistically there is a 2/3 chance that 2018 may be positive for the S&P 500 and that the proposed increase in that index comes in at roughly 8.5% and that intra year volatility will be higher than 5%.
Interesting, no? Even more so because if this is what we are going to see in 2018, everyone will be happy. The doom sayers will thanks to high intra-year volatility be able to say, “we have always said the markets are to pricy and will have to go down” and the optimists will still see a positive over all year.

Fact is nobody knows where markets are heading therefore it is so important to invest after a plausible investment strategy and be willing and able to live with volatility.

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,