Waiting Out The Weather

Posted on February 15, 2019 by Gemmer Asset

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“In many ways, the stock market is like the weather in that if you don’t like the current conditions all you have to do is wait awhile.”

-Lou Simpson

 

Lou Simpson is the former CEO of GEICO’s capital operations and at one point was thought to be the successor to Warren Buffett’s perch atop Berkshire Hathaway (they ultimately didn’t choose him because he was only six years Warren’s junior). In any event, Lou’s quip highlights two topics that are front of mind lately; the weather and the stock market. Today, we’ll focus on the latter.

 

2019 has been a stark contrast to how last year finished. December of 2018 was the worst December for the S&P 500 ever with most equity markets bottoming on Christmas eve (similarly, it was the worst Christmas eve trading day on record). We’re less than 2 months from that bottom and the bounce back has been significant.

 

Here is a chart of how the major asset classes have performed since the December 24th bottom:

 

These are some impressive numbers. Virtually all equity asset classes are up double digits since the lows, with US small cap up +24%. And while most risk assets aren’t back to their peak levels, they’ve climbed much of the way back. Here are how these same asset classes have done since the end of September:

 

 

Emerging markets are essentially back to the highs and the S&P 500 is about -5% off those levels. Small cap stocks have been the most volatile, suffering both the biggest draw-down and rebound.

 

Bonds have been positive over this same time period. US Aggregate and short-term bonds are up +3% and +2.1%, respectively. High yield credit, being more correlated with equities, is up +1.4%.

 

Bottom line, the rebound has been significant in both magnitude and its pervasiveness across asset classes.

 

What If You Have A Hard Time Waiting Out The Weather?

 

The fourth quarter was a wild one in the markets and December was particularly tough to stomach. Lets take a look at what the S&P 500 did during that time frame and how being overly “reactive” in volatile markets can affect investment outcomes. The below chart shows the performance of the S&P 500 (with a starting value of $100) since September 20th.

 

 

If you started with $100 invested in the S&P 500 on September 20th (the high in the market) and held it through today’s close, you’d have $94. Not back to your original amount, but a long way from the $79 it was at the bottom. Now let’s say you watched the market start to decline in December and took the following actions:

 

  • Got spooked on the 24th (the low in the market), sold and went to cash

 

  • Watched as the market had a huge up day on the 26th (S&P 500 was up +5%) and got back in on the 27th

 

  • Stayed invested from the 27th through today

 

So, in the last 50 days you would have missed out on a single trading day. What did that one day cost you? As we said above, if you held tight through all the volatility you’d end up with $94. If you went to cash for one day and missed out on the 26th, you’d end up with a little less than $89 – a number that is very generous because it doesn’t account for things like trading costs, tax impact etc.

 

What if that one day of sitting in cash wasn’t just one day, but a week or more. Now we’re talking about huge differences in your portfolio’s value. Compound errors like these over the course of your investment time horizon and you run the serious risk of not meeting your long-term financial objectives.

 

As we wrote in our piece on investing principles last year, the best advice is to “…create an investment plan you’re comfortable with, diversify and don’t make major investment decisions while you’re riding the peaks and troughs of the emotional roller coaster.”  In other words, it’s easier to wait out the weather if you’re inside a house with a solid foundation.

 

 

 

Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.

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