Market Timing or Time in the Market, what is better?
What is the better way forward? A good question to ask. We think Time in the Market is the way to go for the following reason, one less decision to make under stress. What do we mean by this? If one sells to get out of the market as they feel the future is less rewarding, that means they need to decide to re-enter the market. Generally speaking, waiting to re-enter the market is the problem as if you wait until the all-clear signal is given, generally a lot of the gains from the bottom have already taken place.
The following analysis is from DataTrek, 211 Days make the Decade:
"Story Time Thursday this week is about how long run US stock returns actually occur, starting with a statement and then a question:
The S&P 500 is up 167 percent on a price basis over the last 10 years. It started at 1,552 in mid-April 2013 and today’s close was 4,146.
If you only owned the index on its very best days over the last decade, how many days would you need to get that 167 percent return?
Hint: there have been 2,517 trading days over the last 10 years.
The answer is 23 days, just 0.9 percent of all trading sessions in the last decade. Here is a list of those days, clustered by year.
Thirteen of the best days for the S&P 500 over the last 10 years were during the 2020 Pandemic Crisis: March 24th (+9.4 percent), March 13th (+9.3 pct), April 6th (+7.0 pct), March 26th (+6.2 pct), March 17th (+6.0 pct), March 10th (+4.9 pct), March 2nd (+4.6 pct), March 4th (+4.2 pct), March8th (+3.4 pct), March 30th (+3.4 pct), May 18th (+3.2 pct), April 14th (+3.1 pct), and April 17th (+2.7 pct).
Another 6 were, believe it or not, in 2022: November 10th (+5.5 percent), November 30th (+3.1 pct), October 4th (+3.1 pct), June 24th (+3.1 pct), May 4th (+3.0 pct), and July 19th (+2.8 pct).
The last 4 days that made the decade were in 2018 (December 26th, +5.0 pct and March 26th, +2.7 pct), and 2015 (August 26th, +3.9 pct) and 2019 (January 4th, +3.4 pct).
The aggregate compounded gain for these 23 days is 173 percent, just slightly more than the S&P 500’s price return of 167 percent over the decade. The other 2,494 trading days over the last decade were, in old traders’ lingo, “a waste of a clean shirt”. They meant nothing to the S&P’s long run return.
Now, this is a somewhat unfair analysis, since it cherry picks the very best days, so let’s ask/answer another question: how many days over the last decade would it have taken to erase these gains?
The answer is just 19 days:
Most of the very worst days for the S&P 500 over the last decade were also in 2020: March 16th (-12.0 percent), March 12th (-9.5 pct), March 9th (-7.6 pct), June 11th (-5.9 pct), March 18th (-5.2 pct), March 11th (-4.9 pct), February 27th (-4.4 pct), April 1st (-4.4 pct), March 20th (-4.3 pct) and October 28th (-3.5 pct). That’s 10 days in total.
Five were in 2022: September 13th (-4.3 percent), May 18th (-4.0 pct), June 13th (-3.9 pct), April 29th (-3.6 pct), and May 5th (-3.6 pct).
Of the remaining 4 days, two were in 2018 (February 5th and 8th, -4.1 pct and -3.8 pct). One was in 2015 (August 24th, -3.9 pct) and the other in 2016 (June 24th, -3.6 percent).
Simply put, if you owned the S&P 500 on just the 23 best days of the decade but also owned the index on the 19 worst days (and otherwise had no equity exposure), you’d be flat today. No gains whatsoever.
The conclusion therefore is that outsized winning or losing days do not drive long term returns, but then what exactly does explain the S&P’s 167 percent price gain since April 2013? Three points to answer that question:
The index has had 1,153 days with negative returns over the last decade.
It has had 1,364 positive days (including today) over the last decade.
The average return for down days and up days is very close: -0.74 and +0.71 percent, respectively.
The upshot here is that 211 days (1,364 up days minus 1,153 down days) have made the decade, or just 8.4 percent of all trading days. Since we’re talking about a decade-long span here, that works out to 21 days/year on average.
Three takeaways from this analysis:
The first you already know, but the math here further supports the idea that long term investing is a game of inches, not yards or miles. Outsized days don’t make or break long run returns. Rather, it is the market grinding out a few more up than down days in most years that allows for positive long run compounding of returns.
That’s even true for the limited sample size of this year’s S&P 500 returns. Thus far, we’ve had 32 down days, averaging a 0.8 percent decline and 38 up days, averaging a 0.9 percent gain. We’re up 8 percent on the year, thanks entirely to that slight upside tilt.
The second is a brief reminder that stocks don’t levitate by magic; earnings growth is responsible for two thirds of the S&P 500’s gains over the last decade. Ten years ago, the index was earning $100/share. We should do around $210/share this year. That is a 110 percent increase. The balance of the S&P’s 10 year gains come from multiple expansion. Data from FactSet shows the index was trading for 13 – 14x forward earnings in 2013. Now it trades for 19 – 20x that $210/share estimate.
The last is something I (Nick) once heard a grizzled old cyclicals trader often say when I was working at the old SAC Capital (now Point72) over 20 years ago: “The game is rigged to the upside”. Yes, there can be periods when that sounds naïve; 2022 was one such time. This does not, however, make this sentiment any less true. The “game” may not allow for steady gains, but they do eventually come. Literally one day at a time …" - DataTrek
Recently we were sent a paper titled: Long-term shareholder returns: Evidence from 64,000 global stocks, current draft March 2023.
Quite simply they studied long run shareholder returns for over 64,000 global common stocks from January 1990 to December 2020. The conclusion was that the majority (55.2% of US stocks and 57.4% of non-US stocks) underperformed the one-month US Treasury bills in terms of compound growth over the full time period.
However, focusing on aggregate shareholder returns, the top performing 2.4% of firms in the US accounted for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to 2020. Outside the US, 1.41% of the firms accounted for $US 30.7 trillion in wealth creation.
This finding does not contradict the Time in the Market, is more important than Market Timing. The average buy and hold return across stocks in the sample exceeded the US Treasury Bill return at each time period. The distinction between positive return premium for the broad stock market returns and negative premiums for individual stock returns is a result of the disproportionateness (skewness) of returns to individual stocks, particularly at longer time horizons.
During the period from 1990 to 2020, wealth creation was highly concentrated. Five (0.008%) firms with the largest wealth concentration were Apple, Microsoft, Alphabet (Google), Amazon and Tencent accounted for 10.3% of the global net wealth creation. The best performing 159 (0.25%) firms accounted for half of the global net wealth creation. Finally, the best 1,526 (2.39%) firms accounted for all global net wealth creation.
In summary Time in the Market is more important than Market Timing.
From Dr. Torsten Slok, chief economist for Apollo Global Management, the following chart shows US household balance sheets are in great shape. To us at RMH, this is one of the charts that has us confused as to whether we have no recession, soft landing/gentle recession or a hard landing. Quite simply, we are in the camp of no recession or a soft landing. The underlying economy is too strong at this time as evidenced by almost full employment, and US households are in a strong financial position.
As always, we live in interesting times, and it is a joy for us to try and understand what is happening here in the US and around the world as it affects investments.
If there are ever any topics you wish for us to explore, please let us know. We are here to help and guide you through these times.
We thank you all for taking the time and reading “Market Watch.” It is meant as an educational piece on the always evolving markets. It is something we plan on providing every month, and your feedback is very important to us.
On a personal note, RMH is now in the position to bring on new clients so please be sure to share this informational letter with whomever you wish. RMH’s focus is on the customizable investment needs of individuals, families, and foundations. We enjoy working with our clients to better understand their goals, values, and passions for what is important in their lives. In expanding our client base, we look forward to working with people who share these same desires.
Richard Mundinger, CFA
Ashlyn Brooke Tucker
DataTrek April 13, 2022: 211 Days Make the Decade