Here’s What Happens When Markets Crash

Eight years ago, the US and Australian stock markets slid 55.65% and 53.95% respectively, all within a 15 month period. Your $1,000,000 share portfolio would have been worth around $450,000. Here’s what it looked like (click for larger image):

Source: Thomson Reuters

Investors were liquidating their portfolios and piling into cash as there was no end in sight. Fear and uncertainty were at an all time high, even though the duration of this bear market was shorter than the average.

In fact, by the time the market bottomed out in 2009, investors were selling down their share portfolio at the fastest pace in over a decade. Precisely at the worst time (click for larger image):

The ‘pros’ were giving in too. In 2009, global fund managers’ allocations to the share market relative to other asset classes were at an all time low.

Humans are an irrational bunch. We tend to think in certain ways that lead to systematic deviations from good judgement.

Here’s what happened next. US stocks climbed a whopping 255.44%, and Aussie stocks up (a mere, relative to the US) 82.79% (click for larger image):

Source: Thomson Reuters

With the stock market at all time highs, and having lasted for so long, we’re hearing commentators and investors question the market’s ability to push any higher.

The current bull market has lasted around 8.1 years, making it the 5th longest bull market since 1926. Although it feels like it’s the longest, right? In fact, it’s also 5th not only in it’s duration, but also in magnitude.

Since 1926, the average bull market has lasted around 8.9 years, with an average cumulative gain of 468%. The current bull market has gained around 255%.

What’s interesting from the chart below, is how dominating the blue shaded areas are relative to the orange (bear markets). The average bear market has lasted 1.4 years with an average cumulative loss of 41% (click for larger image):

I thought it would be interesting to see the stats for the Australian share market, so I ran the numbers and have summarised in the table below:

Of the 351 months since 1980, the Australian stock market has been up 220 periods (63% of the time), and down 131 periods (37% of the time).

Source: Returns 2.0

If you then extend your time horizon to a rolling 5 years, since 1980, the Australian stock market has only ever seen 1, 5 year period of negative returns. It began in 2007 and fell on average -4.27% pa for 5 years. Every other 5 year rolling period has seen the Australian share market return a positive number with an average return of 11.52% pa (click for larger image):

Source: Returns 2.0

Even after one of the greatest crisis in history, if you had simply held course, here’s what your portfolio would have looked like. A $1,000,000 investment at the peak of the stock market would be worth $1,325,000 today (click for larger image):

Source: Returns 2.0

Whether this market will collapse tomorrow, or in 12 months from today, nobody really knows. What is certain however, is that there will be another collapse, and that you’ll be told that it’s different this time (it’s unlikely to be). In the end, it’s completely out of our control.

Design and construct your portfolio today as if the market will crash tomorrow. Because that is when your true emotions will flourish. How tolerant are you to volatility and risk. What is your investment horizon. How patient and disciplined are you. These will all be challenged. Your actions from these emotions, are all in your control. What the market does is not.

Here’s why you’re not a long term investor

You hear people talk about it all the time, you know, “long-term investing”. In my experience, everyone is a long-term investor when markets are going up. The truest test for long-term investors is when markets are going down…fast.

It may seem like a distant memory for some, but stocks around the world plunged almost 50% during the GFC. What did you do when this happened? Did you panic? Did you ‘buy the dip’? Did you bail?

1. Have a plan…and stick to it!

My guess is the above question will be largely dictated by whether you had a plan or not – because in good times and bad, your investment plan will make the decision for you.

Since the GFC, I’ve heard many commentators and investors complain that a diversified portfolio failed to keep up with the raging bull market since 2009. In fact, this is only half of the story! As the chart below shows, a portfolio that included bonds saw reduced losses during the financial crisis, and recovered much faster than a portfolio that only held stocks.

Source: JPMorgan Asset Management

2. Ignore the noise, listen for the signal.

Every year, we’re told this year is the year markets will collapse. History tells us that every year has a rough patch. Take a look at the chart below. The red dots on this chart represent the maximum intra-year decline in every calendar year for the S&P 500, since 1980. While these pull-backs can’t be predicted, they can be expected; after all, markets suffered double-digit declines in 21 of the last 37 years.

But despite the many pull-backs, roughly 75% of those years ended with positive returns, as reflected by the gray bars. Investors need a plan for riding out volatile periods instead of reacting emotionally.

Source: JPMorgan Asset Management

3. Diversification. It works. Stop complaining.

Markets are always volatile, and the last 15 years have been a rough ride for investors. That’s what makes a market, and that’s why you’re compensated with a return (if you remain invested).

Despite the rough ride, cash has been among the worst performing asset classes shown in the below chart. Meanwhile, a well-diversified portfolio of stocks, bonds and other uncorrelated asset classes returned nearly 7% per year over this time period (and over 150% on a cumulative total return basis).

Next time sometime tells you to sell out of an asset class and get into another, show them this chart and ask them how predictable the future is.

Source: JPMorgan Asset Management

4. You suck at investing.

This has to be my favourite charts of all time.

It’s the famous Dalbar study titled “Quantitative Analysis of Investor Behavior.” It estimates that over the last 20 years, the average investor has achieved a scant 2.1% annualized return as compared to more than 7% in a 60/40 stock/bond portfolio.

Why? Because we (human beings) are wired that way. We would prefer to avoid losses to acquiring equivalent gains – it’s better to not lose $10 than to gain $10. Studies have shown that losses are twice as powerful, psychologically, as gains.

Source: JPMorgan Asset Management

There are so many forces preventing you from becoming and remaining a long-term investor. It’s hard, I understand. Yet you don’t have to suck at investing, really, you don’t.

I’m going to stick my neck out here and make a prediction. Stocks will fall 30%. I don’t know when, but I know it’s going to happen, and I’m mentally prepared for it, so too is my balance sheet. Think about what this could mean for your portfolio. Translate it into dollar terms, it makes it feel more real.

Ask yourself, if stocks fell 30% tomorrow morning, will this impact your life in the short-term? If the answer is yes, you need to make some changes so that you can remain a long-term investor when markets aren’t going up. And most importantly, you can continue to live the life you want. Because money is simply a means to an end.


My Monday Rant

It’s been a little while since I’ve had the opportunity to write to you, as so much has been happening. We held our first investment forum for 2017, discussing the great property bubble with some of the best in the business, which was a great success. We had a full house of clients, developers and investors. I’ll be sharing key take outs of the forum in the coming weeks.

Over the past few weeks, a whole bunch of stuff has been happening, so I thought I’d give you a run down of what I’ve been seeing and thinking:

+ Don’t be fooled. Everyone talks about how great the performance of the US stock market has been over the last decade. A closer look will tell you that even the German stock market has performed better than the S&P 500. Don’t believe everything you read in the paper.

Source: Yahoo Finance

+ The US stock market has been falling over the last few days leading up to the healthcare vote in the US. Financial media had been reporting the impact this has had on markets. This is the drop they’re talking about…

Source: Thomson Reuters

I’ve also been reading about what this means, and what impact it will have on financial markets. No one still know’s what caused the Black Monday crash in 1929…88 years on, and we expect people to have the answer to something that hasn’t even happened. Let’s get serious for a second folks. The same doomsayers that were telling us a Trump Presidency would be catastrophic for financial markets continue to publish their pessimism and expect the general public to hang off their every word.

In the end, the bill was shot down and stocks rebounded.

+ This is why you shouldn’t take forecasts seriously, even from Central Banks. Wage data was released last week. I thought it would be amusing to revisit this chart, which shows the RBA’s regular forecast of wages with actual.

The RBA has been forecasting higher wages since 2011. They’ll be right eventually.

+ Prime Mister Turnbull has been considering allowing First Home Buyers (FHB) to access their super to purchase a home. This has to be the height of stupidity. I will not waste your time and expand.

+ Apparently foreigners are “hoovering” up all of our property. No one could really quantify this, until now. We have the data (dun dun duuuuun):

  • NSW – 25% of new supply
  • VIC – 16% of new supply

So, 1 in every 4 in NSW and 1 in every 6 in VIC. Not very “hoovering” is it?

When we hear the the term “foreigner”, most people think of the Chinese. And rightly so. Here’s how much the Chinese make up of foreign buyers:

It’s quite staggering actually.

Nevertheless, do you ever wonder why this is the case? This is one of many reasons. Although a compelling one, the storage of wealth probably ranks higher than price, certainly from the discussions I’ve had with Chinese investors. Anyway, here’s price and yield from the point of view of our Chinese neighbors.

+ The Melbourne/Sydney apartment property boom/bust theory continues. We’re told construction, prices etc. have all the traits of a bubble not seen anywhere else in the world. If we take a look at other mature apartment markets in the world, such as New York, we’ll quickly learn that this has happened before and has not ended the way the doomsayers claim. Here’s New York apartment prices (per square foot) since 1910. They’ve been climbing since the 1950s.

In the end, no one really knows what the future holds. No one really knows what impact certain events will have on financial markets. Trying to front-run the global markets’ investors is nothing but pure speculation. It’s easy to do it when it’s not your money. Next time someone tells you what they think, or what you should do with your money, ask them what they’re doing with they’re money.


The market doesn’t care who the President is

We continue to see and read about President Trump’s policies, plans, old and new advisers, and what these mean for the stock market. I mean, some banks and hedge funds are using computer programs to trade instantly on his tweets. Yet one thing is very clear to me. It actually doesn’t matter.

What Trump says or does, and whether this is good or bad for the stock market is pure speculation. Why? Because the stock market does not discriminate. It does not care who the president is.

The table below takes a look back at every president since Herbert Hoover to see how bad stock market losses have been for each four-year term in office. It also shows us the worst drawdown on the S&P 500 for each term going back to the late 1920:

Here’s some fun facts for you:

  1. The average loss over all four-year terms was 30 percent.
  2. The average loss under a Republican administration was 37 percent.
  3. The average loss under the Democrats was 24 percent.
  4. Total returns under Democrats were 1,340 percent.
  5. Total returns under Republicans were 1,270 percent.

This may come as a shock to many, but the President of the United States does not have a magic lever in his office he can pull to force stocks to rise or fall. It’s hard to believe, I know, but he doesn’t.

At the end of the day, it comes down to where we are in the economic cycle. Ben Carlson sums it up perfectly:

“Yes, presidents probably have the ability to make things marginally better or worse when it comes to the markets. After all, sentiment plays a huge role with investor preferences, so it’s possible a president can awaken animal spirits to get people excited about prospects for the future. Yet the highest office in the land tends to get far too much credit when things go right and too much blame when things go wrong.”

The fact is, we’ve seen a massive recovery in the stock market since peak of the GFC. What we know for sure, not only with the stock market, but with any investment, is the higher the price you pay, the lower your expected return.

A little technical, but the chart below highlights this point. The higher the multiple you pay (across the horizontal axis), the lower your subsequent returns (up and down the vertical axis on the left hand side).

Large gains are always followed by large losses, and large losses are always followed by large gains. You don’t need to be an expert to figure this out. This is the market. It’s an investor’s ability to ride through the ups and downs, and not succumb to buying at all time highs, and selling at all time lows, that will ensure the odds of positive returns are in your favour.

The market doesn’t care who the president is.

All the best,


Source: Ben Carlson, Bloomberg, JP Morgan Asset Management

The market just made you look silly. Again.

Happy New Year everyone!

A new year is seen as a fresh start. A reset. Forget the old you, this is the new you. You know, the first blank page of a 365 page book. It’s also one of the busiest times of the year where you’ll be flooded with “high conviction” ideas, predictions, and forecasts by many gurus.

I beg you, before engaging or executing any of these convincing ideas, think seriously about what you are doing and why. As a friendly reminder, I share with you 16 (a mere fraction) of the usual hysteria of 2016. It was yet another year that made the prognosticators look silly.

2016 S&P 500

1) Jan 7 – “The stock market is off to its worst start to a year ever.” – USA Today

2) Jan 12 – “Sell everything…Oil will trade at $16 a barrel and stocks will fall 20%.” – RBS

3) Jan 13 – ‘I’m really concerned. We expect more victims ahead, including eventually safe-haven stocks.” – Douglas Ramsey, Leuthold Group

4) Jan 28 – “Time to put 30% of your assets in cash.” – Mohamed El-Erian

5) Feb 5 – “The world economy seems trapped in a death spiral.”  – Citi

6) Feb 15 – “Things haven’t gotten bad enough to get good again.” – CNBC

7) Feb 15 – “Don’t bother buying. It’s capital preservation time. Better to hold on and get a better moment.”  – Jim Cramer

8) Feb 29 – “Global funds flee stocks, raise bond holdings to five-year high as growth fears mount.” – Reuters

9) April 13 – “Stock funds posted outflows of $5.8 billion last week…..investor pessimism for U.S. stocks stems in part from low expectations.”  – Financial Advisor

10) May 18 – “This statistically significant death cross…could be the real deal. The first took place in 2001 and was followed by a 37% decline, while second pattern occurred in 2008 and preceded a 48% drop.”  – Intermarket Strategy

11) May 23 – “7 Unmistakable signs that a bear market is approaching.” – Jeff Reeeves, MarketWatch

12) July 5 – “Our year-end target remains 2,100, reflecting a potential 6-month return of 0.1. That represents a return of 2.74% for the whole year.” – Goldman Sachs

13) Aug 1 – “Sell the house, sell the car, sell the kids…sell everything. Nothing here looks good.”  – Jeffrey Gundlach

14) Aug 31 – “We are on the edge of a cliff right now.” – Robert Kiyosaki, author Rich Dad, Poor Dad, while advising all his listeners to exit the market completely

15) Oct 12 – “ With the US stock market selling off aggressively on 11 October, we now issue a RED ALERT.” – Murray Gunn, Head of Technical Analysis, HSBC (Murray references his use of Elliott Wave Theory)

16) Nov 1 – “If Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks — and a likely crash in the broader market.” – Simon Johnson in Market Watch

Oprah Winfrey once said:

Cheers to a new year and another chance for us to get it right.


Source: Peter Mallouk, Creative Planning

The forecasting season

‘Tis the season to make forecasts. As we approach the end of the year, newsroom staffing dwindles and editors look for space fillers to keep the readers happy. Yes, here come the investment “outlooks” again.

Each year at this time, the financial pages are filled with “investment outlooks” that tell us what we can expect to occur in the markets in the coming year and where the best bargains are.

Starved of news, reporters usually find there is no shortage of experts willing to share their forecasts with a public primed to believe that sound investing is all about finding a reliable crystal ball.

Of course, these features can be fun to read if you don’t take them too seriously. And they become even more entertaining a year later.

During the rocky start for global shares in January 2016, one major investment bank issued a call to investors to “sell everything”, warning of a deflationary crisis and a cataclysmic year on markets.

“Sell everything except high quality bonds,” the bank advised clients in a research note. “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”

The bank forecast a decline of up to 20% in major stock markets, a fall in world crude oil prices to as low as $16 a barrel with only high-quality government bonds showing a positive result for the year.

At the time of writing, with 2016 almost over, those forecasts look well wide of the mark. As at late November, the major US equity indices were all at record highs. The UK FTSE-100 recently hit record highs and Brent crude was near $50 a barrel.

Yet if you had known in advance the news of the year you might have imagined different outcomes, with the results of the Brexit referendum and US election confounding many media and market pundits.

Another favoured media template around the turn of the year is to come up with a list of “hot stocks” for the coming 12 months.

For instance, one popular website last December picked “three top Australian shares for 2016″—shopping centre giant Westfield Corp, digital real estate business REA Group and healthcare company CSL.

Each company had “strong management teams, defensive earnings and the kind of profit-growing business models that should be able to survive all but the most severe of economic downturns,” the website said.

Now all of that may well be true, but as at late November 2016, Westfield Corp shares were down 4.3%, CSL was 4.7% lower and REA Group was down 9.5% compared with a market return of 1.2%.

Inevitably with these lists, some stocks will do well, while others will do poorly. Without seeking to denigrate the abilities of forecasters, it is a tough job to consistently outguess the market. It’s even tougher when your picks come out of a media list that many other people are reading.

In any case, a small portfolio like this is likely to be unnecessarily concentrated and open to what’s known as idiosyncratic risk—influences related to individual companies and sectors.

For instance, another news outlet picked a UK-based financial services company as a possible “currency play” for 2016, saying it might benefit from the Australian dollar weakening against the British pound.

Well, that might have been a good idea at the time, but the AUD actually rose nearly 20% against the pound year-to-date, the appreciation accelerating after the UK’s vote to leave the European Union.

Another stock in that list, James Packer’s Crown Resorts, ran into trouble in October when Chinese authorities arrested 18 of the gaming giant’s staff as part of a crackdown on illegal gambling in China.

So you can see that investing based on forecasts about individual companies is extremely difficult because you have to take into consideration so many moving parts and future events (that are by definition unexpected).

A better approach is to diversify as broadly as possible across stocks, sectors and countries so as to lessen the influence of any one company, sector or jurisdiction.

Diversification is an antidote to avoidable risks like holding too few securities. It can also save you from missing opportunities. Neither list cited here included Fortescue Metals Group (up more than 200% YTD), Bluescope Steel (up more than 100%) or Worley Parsons (up 85%).

By broadly diversifying, you’re taking the guesswork out of investing and saving yourself a whole lot of time scouring the investment pages for stock picks.

Most of all, you’re more likely to have many happy returns.

This article was originally written by Jim Parker, Vice President of DFA, guest contributor to Baharian Wealth Management’s Think Tank

The banks suck at picking stocks. Here’s why.

It’s a Sunday afternoon, you’re chilling out at a friend’s bbq, the sun in shining (you’re obviously not in Melbourne), and of course, the conversation moves to investments. You’re buddy tells you about the latest tip he’s getting from his bank. Let’s call this bank Soldman Gachs. It’s difficult to ignore these bets by such a powerful investment bank. I mean, who are we to question these recommendations by the know it all “smart money”? So, what do you do? Take the tip, or grab another beer?

Lucky for you, the good folks at InterTrader have done the grunt work. They’ve taken all the recommendations made in 2015 by the top 16 investment banks, and analysed all the data. They’ve analysed the potential returns as well as the accuracy of their bets.

The results…well, let’s just say they’re underwhelming.

Let’s say you took all the bank’s advice in 2015, holding each recommendation until the end of the year. Here’s what your position looks like (click for larger image):

picking stocks

The bank’s accuracy was 43%, and your total gain was -4.79%.

If you had simply bought and held the index, you were 4.10% better off. In fact, if you had simply left your money in the bank, you could have been even better off. You could have flipped a coin and would have been more effective than taking these tips.

Next time you’re going to take a stock tip, please think really hard about what you’re doing and why. Here’s friendly reminder of some of the calls pundits have made over the last six years (click for larger image):

stock picking

Stock market wins again. Thanks for playing folks.

Source: InterTrader, Visual Capitalist, Trade Navigator

Worried about the stock market?

Friday the 4th of November marked the longest stretch of declines (9 straight sessions) in the US stock market since 1980. Scary right? Sure. What followed was a steady stream of gloomy predictions by market “experts”. Not surprisingly however, here’s what happened subsequently:

Source: Thomson Reuters Eikon

The market climbed 5% within days. Now that would have been poor timing.

You used to be able to make forecasts and predictions and get away with it. People wouldn’t remember them all. You’d then only market the ones you got right. Absolute genius.

Today however, it’s a different story. People don’t need to have a good memory. Google does that for us. The more investors I speak to, the more it’s becoming evident to me that people are learning to ignore these charlatans.

I mean, the latest US presidential election was a prime example. I’m not going to go into detail as we all know what happened. What I will share with you however, is how quickly headlines change.

Here’s what Citigroup had to say pre election:

stock market

Here’s how quickly they changed their minds:

stock market

The immediate reaction of financial markets forced these experts to change their tune. Price changes sentiment, and it does so very quickly. This was not only a Citigroup thing, it was all the so called experts.

Can you imagine the destruction of wealth that would occur as a result of taking this free advice? You pay for what you get right?

As difficult as it may seem, it’s important to take the long view. What we’re seeing today, and what we’ve seen in the past is a mere blip over the long-term.

Kieron Nutbrown, former head of global macro fixed income at First State Investments in London, put together what I think is a brilliant piece of work and just the reminder to help investors take a few steps back and take a look at markets through a much wider lens.

His chart follows the path of global stocks over the past 500 years and demonstrates how prices have fared through wars, revolutions and depressions.

stock market

Click here for gigantic version

The chart provides a great visualization of the ups and downs of market sentiment. The greed, the fear, and the actions that follow. What does this chart tell us about the future? Not much. But I’m sure you’ll have experts who’s job it is to make daily predictions construct a compelling story. What it tells me is that the stock market has handsomely rewarded long-term investors.

Despite all the evidence pointing to peoples inability to accurately and consistently predict the future, we’ll continue to see what was traditional practice continue.

There is nothing wrong with admitting you don’t know what the future holds. But this should not and will not stop you from making good decisions.

For those that are wondering what’s up with the featured image of this post, let me explain. The image and detail was borrowed from Index Fund Advisers, a US based wealth management company. The scene depicts a street in Amsterdam that had erupted into a trading frenzy. At the Quinquenpoix coffee shop, overflow trading became the norm because the exchange had become too crowded with traders manically trading to gain quick wealth. At the scene’s center, a cart is being pulled by characterizations of the bubble stocks of the time, including companies like the South Sea Company, the Dutch East Indies Company, and the West Indies Company, a banking company and an insurance company. Driving the cart is Lady Insanity, while the Goddess Fortuna floats above, dropping stock certificates littered with snakes, while the devil blows bubbles in the air. Meanwhile, Lady Fame slowly, but assuredly, leads the cart to one of three destinations: the hospital, the mad house, or the poor house.

Next time your faced with making an investment decision, you can take the advice of Paul the Psychic Octopus, or you can look to evidence and logic to guide you. The choice is yours.

My portfolio post Trump

There it is folks. It happened. Then, the sun rose this morning. Although some did expect it to, the world did not end.

In yesterday’s note I said this would be a buying opportunity if you had cash and time on your side. Alas, you won’t get the chance to follow through with this strategy. See chart below.


Source: liveindex

Michael Batnick from Ritholtz Wealth Management wrote a great post this morning, where he summed up the situation better than anyone could put it. Here’s his common sense view point:

When I woke up losses had been pared to -2% and when stocks opened at 9:30, they were positive within minutes. If stocks had opened down 5%, it would have just been the 76th time that’s happened over the last 88 years. Although the S&P 500 would have been just 7% off its all-time highs, you never look a gift horse in the mouth, which is what I said when I bought more European stocks directly after the Brexit.

To be clear this was not a market call. I don’t have an investment “thesis.” I don’t do macro. I have no idea how all of this shakes out. I don’t know which direction interest rates will go or what effect they’ll have on stocks. I don’t know where inflation will be next year or what it might do to the dollar. I don’t know how a Republican President with a majority in Congress will effect certain laws that might change the way some businesses operate in America. But I am 100% certain of a few things:

  1. I cannot time the market.
  2. Over time, stocks pay you for taking risk.
  3. Less is more, you’re not awarded any extra points for complexity.
  4. Barring an early termination, I have decades of investing in front of me.

There’s another thing here that’s extremely important to me, our clients. If stocks did open down 5% or more, I wanted to be able to say to our advisors and our clients that I was a buyer of stocks. Not that I thought this was the “optimal” time to buy, or that there wouldn’t be more pain ahead, but rather to demonstrate that I practice what I preach, that I eat my own cooking. It’s easy to talk passionately about something when you believe it with every fiber of your being.

People might call me smug, young, or naive. And while it’s true that I never saw my portfolio fall by 50%, to those people I would ask, does experiencing one bear market make the next any easier? I speak to a lot of investors and I’ve never seen someone say “Oh yea, the dotcom bubble sucked and I made some really bad decisions, but then when the financial crisis came, despite millions of Americans and a lot of my friends and family losing their jobs, I just tuned out the noise.”

Please, don’t kid yourself. It never gets easier.

So does this mean that I just buy the S&P 500 and forget about it? That’s certainly not a terrible option and would put me ahead of most investors over the long term, but I diversify across the globe and across strategies. I don’t feel the need to outsmart the market and I’ve never been more convinced  that nobody knows nothing. How could you look at the market today and come to any other conclusion? So that’s what I do with my portfolio. It’s what works best for me. I hope you find what works for you.

The S&P 500 is now 6% off its overnight lows and pretty close to new all-time highs. So I didn’t get the chance to buy, oh well. Maybe next time.

Now that the US election is out of the way, the horizon is all clear right? Well, I’ve got some bad news for you…

Source: Zero Hedge

Risky assets will never give you a free kick. You need to concede there are always risks present. There is always an event that could “shake the world”. You need to look beyond the headlines, look at the facts, and make investment decisions that support your personal goals. Look at history and you’ll be rewarded, handsomely. If you can’t do this, risky assets are not the place for you.

At the time of closing this note, the Aussie share market is up over 3% this morning after falling over 2% yesterday.


Source: Thomson Reuters Eikon

There could not have been a worse time to sell.

How the US stock market performs in election years

For most folk, the end of the 2016 US elections cannot come any sooner. Then again, I’m sure most folk can’t wait for the next presidential election either…if you know what I mean. Although the outcome of the election is uncertain, what is certain is the speculation that will continue between now and then as to the impact on the stock market and investor portfolios. Before we start getting too caught up in what might happen, let’s take a look at how markets have performed historically.

Typically, the stock market has a positive return in election years. In fact, 82% of the time.


Here’s a summary of the average returns for the US stock market during presidencies since Hoover.




Can you detect a pattern? Okay, let’s keep going.

Let’s look at it a little differently. Here’s the growth of $1 invested in the S&P 500 back in 1926 through to June 2016.


Did it really matter who or which party was in power over the long-term? Sure, you might ask who has a 90 year time frame? Take a look however at any 10-20 year rolling time frame, my guess is that the odds are in your favour for a positive return.

Although returns tend be to positive at the outset of a presidency, they climb throughout a president’s fourth years. The president may attempt to pass most legislation in the first two years when a perceived ‘mandate’ follows an electoral victory. If legislation doesn’t pass in the first two years, it will almost never get through in the back half of the term. Fourth years aren’t quite as strong as third years, but are still overwhelmingly positive.

Here’s the percentage of positive versus negative returns in each year of presidency.


Clinton and Trump are probably the most disliked candidates in history. Does that mean this time is different? Let’s take a look at history from a different angle.

The chart below shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election.



Short-term trading

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.

Long-term investing

Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. The chart above shows us the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.

Bringing it all together

Equity markets can help investors grow their assets, but investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

Whether it’s the US presidential elections, Brexit, European elections, IS, risks will always be present. If there were no risk, you should not expect to be compensated. The stock market is not a place for those who cannot stomach short-term volatility, rather, for those that can see the compelling long-term evidence. Warren Buffet once said, “The stock market is a device for transferring money from the impatient to the patient”.

Source: Visual Capitalist, Dimensional Fund Advisers