Look in the mirror. Stocks had a sluggish start yesterday but they quickly recovered and powered higher for solid gains. Tech stocks remained under pressure after Monday’s selloff but they managed to close in the green in a late day run-up.
N O T E W O R T H Y
Sweeping generalizations. My regular readers and clients know that I am quick to point out that market timing is fool’s errand. “Markets are vagrant” is one of my favorite lines. In fact, I used it in yesterday’s market note. I don’t just use it as an excuse to avoid answering the question I get many, many, many times a week: “Should I buy here?” I know from readily available statistics, personal experience, and my own research that one cannot consistently time the markets. By timing the markets I am referring to picking short and mid-term bottoms and tops. Hold that thought for a moment. Just so you know, wondering if the market will go up or down from here is a natural instinct. Even though I am against it, I myself often ponder the question only to remind myself of its futility. Ok, back to the point. Notice that I intentionally add the words “short-term” and “mid-term” to my statement. Why do I do that? Because when the question is posed to me, it is usually by someone who is seeking some near-term comfort. Money, after all, is critical to our ability to thrive, though there are other components. Therefore, nobody wants to lose money. “Mark,” you say, “thanks for that blinding glimpse of the obvious.” Expanding further, educated investors understand that risk and return are related. Taking greater risks means that one may earn greater returns… or losses. Risk can be defined in many ways. One of the most common is volatility. You may not be surprised to know that there are many ways to calculate volatility, but for our discussion, let’s just say that a volatile investment can go up or down a great deal in a short period of time. If a company is able to make good on its guidance and the markets are going up, highly volatile stocks can return a great deal. Should promises fall short or markets falter, the results could be disastrous. Let’s stick to the positives for a moment.
Assuming that markets are going higher and a company is hitting its goals, the volatile stock (riskier) will do better than a less volatile stock (lower risk). Think of high-flyer Tesla (TSLA) versus Clorox (CLX). Both have gone up, but Tesla… well you probably know at this point. Now a brief word about timeframe. Though market timing is most-often unsuccessful, long term investing success is possible… and we have the data to prove it. Longer holding periods decrease one’s loss potential relative to their gain potential. A Charles Schwab study showed that in historical periods of 1 year, investors could have earned as much as +54% with a potential loss of -43.3%. So roughly, a 1 to 1 gain to loss ratio. Five-year periods had a potential for +28.6% on the upside with only -12.5% on the downside. Roughly a 2 to 1 gain to loss, which is an improvement. If you were to hold an investment for a ten-year period, your upside would be +20.1% with a downside potential of only -1.4%. That is a 24 times greater potential gain than risk. So next time you ask me that question, ask it like this: “is now a good time to be invested for long term gains?”
THE MARKETS
Stocks rose yesterday as earnings season kicked off. Tech stocks still lagged but managed to close positive while bank stocks began to announce earnings with mixed results. The S&P500 climbed by +1.34%, the Dow Jones Industrial Average rose by +2.13%, the Russell 2000 traded up by +1.76%, and the Nasdaq Composite Index added +0.94%. Bonds also rose and the 10-year treasuries added a basis point to yield 0.62%.
NXT UP
- Empire Manufacturing (July) is expected to have risen to 10.0 from last months -0.2% drop.
- Industrial Production (June) may have grown by +4.3% month over month, compared to +1.4% in May.
- The Fed will release its Beige Book this afternoon. It will be closely watched today because it may provide some region-specific information on how businesses are coping with a resurgence in virus cases.
- This morning, United Health Group, Bank of New York Mellon, US Bancorp, and Goldman Sachs all beat by double digits while PNC Financial missed… by a lot. After the bell, we will hear from Alcoa and Sleep Number.