Monday Market Update – September 19

September 19, 2022

Forefront‘s Monday Market Update

The Easiest Button to Push

Past performance is no guarantee of future results. We have all heard that a million times, and as a financial planner, it is something I am required to remind my clients of regularly. It doesn’t ONLY mean what you think, though, and a meeting I had yesterday with a client had me thinking about this on the drive home.

“Pros” don’t beat the market

Over lunch yesterday, my client, a rational, down-to-earth investor, asked me what we could do to get the account back to growing again. Over my sixteen-year career, I have realized that even the most rational investors can’t help but let their own cognitive biases creep up and cause an emotional storm.

I hated that my answer back to him was that there was nothing to be done.

Movies, TV, media, and pop culture have turned financial planners into day traders, with the average person thinking that we somehow have extra information that the public doesn’t have and can trade our way out of market losses. This is not what a financial planner does! Anyone you meet claiming that they have some unique trading technique or system is disingenuous at best and knowingly blowing smoke.

In 2021, 85.1% of Large Cap domestic equity managers underperformed their benchmark, according to the chart above. YTD managers are doing slightly better, with slightly more than 51% underperforming the benchmark. When you dive into the data, you realize that the managers who outperformed last year were not doing it again this year. The random years of outperformance for most managers are just a fluke.

Picking stocks is hard

78% of the individual stocks that make up the S&P 500 index underperformed the index itself between 2000-2020. Over this same period, the S&P500 has gained 322%, while the median stock rose by just 63%.

Simply put, if you didn’t own the RIGHT stocks in the S&P500 over that period, you significantly underperformed the market. A relatively small number of fantastic performers disproportionately influence the overall index’s return.

The issue remains that over the past hundred years, no one has a great or even good track record of identifying those “fantastic performers.”

Easiest button to push 

The easiest button to push is SELL! The thought being once you hit that button, all of your stress and anxiety about the stock market will float away, and the emotional rollercoaster will be over. You might sleep better for a bit, but what happens when the market starts to go back up? How do you get back in, when do you get back in, what metrics are used to determine when to get back in, and what should you buy?

There was a pretty amazing study that was done that looked at the issue of investors who tend to panic. “When Do Investors Freak Out? Machine Learning Predictions of Panic Selling” This study was based on the “financial activity of 653,455 anonymous accounts corresponding to 298,556 households from one of the largest brokerage firms in the United States.”

The study found that 30.9% of investors who panic and sell never return to reinvest in risk assets. Please read that again, and think about what it means. Nearly 1/3rd of investors who panic sell never return and rebuy equities, and in my career and experience, those who come back to the market buy back higher than they sold. The classic sell low and buy high, which is the opposite of successful investing.

Selling is easy, getting back in and picking the right stocks is hard, and never getting back in is a disaster.

So What?

So how does this impact all of you?

  • The plan is the product, not the portfolio.
  • You don’t need to predict the future to be a successful investor, you just cant panic.

Stock market calendar this week:

10:00 AM NAHB home builders’ index
8:30 AM Building permits (SAAR)
8:30 AM Housing starts (SAAR)
10:00 AM Existing home sales (SAAR)
2:00 PM Federal Reserve statement
2:30 PM Fed Chair Jerome Powell news conference
8:30 AM Initial jobless claims
8:30 AM Continuing jobless claims
8:30 AM Current account deficit (% of GDP)
10:00 AM Leading economic indicators
9:45 AM S&P U.S. manufacturing PMI (flash)
9:45 AM S&P U.S. services PMI (flash)

Most anticipated earnings for this week:

About Amit: I am a first generation American, the son of a working-class Indian family, and I lived through my parents’ struggle to find their place in this country, to put down roots that would sustain them as well as their children in a new land. As they encouraged me to excel in school and fostered my hobbies and interests, I was keenly aware of the dynamic between them. I understood that there was a difference between where they came from individually and where we were now. They worked hard in their individual capacities, but they weren’t always on the same page about financial issues – and that can make or break a family’s future. I didn’t know it at the time, but this laid the groundwork for my passion towards financial services and helping families succeed.