An oft quoted line from celebrated fund manager Sir John Templeton stated, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Market watchers pondered the veracity of this maxim as markets soared throughout 2017. Now, rattled by some volatility, the question on many investors’ minds has been: Are we end-of-cycle euphoric?
The current bull market for U.S. equities is approaching its ninth year and if sustained until August, will be the longest running bull market in the history of the S&P 500. However, since the beginning of 2018, it appears each week has offered new potential for corrections, or even a wholesale transition to a bear market. Most recently, concerns about the effect of the U.S. Administration’s trade tariffs—and China’s response—sent markets tumbling.
So how can investors tell the difference between a bull correction and the arrival of the bear? In a recent report, Morgan Stanley Research analyzed S&P 500 trends since 1950 to identify recurring patterns in corrections and market shifts and provide investors with some historical signs that change is afoot.
Market drawdowns happen more often than most investors realize. The report notes that since 1950 there have been more than 100 instances of 5% or more S&P sell-offs, and 32 times in which the drawdown was more than 10%. Over the past century, the likelihood that the S&P is down 5% or 10% at any given point in a year has been 46% and 29%, respectively.
The U.S. stock market plunged Monday, with the Dow Jones falling nearly 1,600 points at one point, the biggest single-day drop in its history. It then turned around and regained 567 points on Tuesday. What the remainder of the week holds in store is anyone’s guess.
Many experts had been forecasting a decline for months after a prolonged upswing resulted in a series of record highs. Several factors are likely to have been involved. The Bureau of Labor Statistics January jobs report, released on Friday, was almost certainly one of them. It generated worries about inflation and bond yields, together with concern The Federal Reserve may raise interest rates faster than expected—events that may have “spooked” the markets.
Markets translate the decisions of millions of people into a price for a stock or bond. Like a spooked crowd in a public place, investors tend at times to run in the same direction—let’s all play the lottery or let’s escape the burning movie theater.
The work of visionaries such as Nobel laureates Richard Thaler and Daniel Kahneman has demonstrated humans do not operate as rational agents, as assumed by classical economics. From this realization have emerged disciplines such as behavioral economics, neuroeconomics and the like.
Last time, I wrote an article discussing a valuable piece of advice from Seth Klarman (Trades, Portfolio) on how to act in falling markets.
The key message of the article was that in a bear market, the best strategy to follow is to continue as you always have. As Klarman notes, “Controlling your process is absolutely crucial to long-term investment success in any market environment.” The last thing you should do is try to time the market:
“While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed…the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.”
In today’s market, after nearly a decade of low volatility and steadily rising stock prices, it is easy to forget the turmoil that gripped the stock market, and the world, in 2008-09.
Even though a crash might seem a million miles away currently, you never know when the next decline might arrive, so it is always best to prepare for the worst. The best way to prepare is to read accounts of investors given at the time.
This will not give you answers as to when the next crash will arrive (all but impossible to predict), but it will provide a sort of template as to what goes on.
Learning from Klarman
One of the most fascinating accounts of investing during the crisis comes from Seth Klarman (Trades, Portfolio). In February 2009, Klarman wrote an article in Value Investor Insight titled, “The Value of Not Being Sure.” Within the article, he detailed how he was investing in the crisis and why he thinks fear is such a great motivator.
There are some common mistakes that the majority of traders make as they dive into trading before they have really studied what does and does not work. All new traders will find many of these things familiar. Some of us had to fight our natural impulses hard to overcome these bad habits.
A Dozen Dumb Things that New Traders Do
For those of us who are stock market novices, the thought of playing the stock market is simultaneously electrifying and terrifying. The stock market seems to present an endless realm of financial possibilities, as long as you know what you are doing. However, for those of us who don’t know where our bulls start and our bears end, the stock market can seem like a dizzying, complex place.The stock market is also home to some truly unusual happenings.
Here are 7 crazy Stock Market facts:
As per Wikipedia, A stock trader or equity trader or share trader is a person or company involved in trading equity securities. Stock traders may be an agent, hedger, arbitrageur, speculator, stockbroker or investor. A stock investor is an individual or company who puts money to use for the purchase of equity securities, offering potential profitable returns, as interest, income, or appreciation in value (capital gains).
So what kind of a trader are you? Read this post, the original of which appears here on the website of Mastermind, Bramesh Bhandari.
