View from the Chair: Windermere's Market Perspectives (December 2017)

154 days – time it took from the Dow to go from 21,000 to 22,000 closing value

77 days – time it took for the Dow to go from 22,000 to 23,000 closing value

43 days – time it took for the Dow to go from 23,000 to 24,000 closing value

These are startling ranges, especially when you consider they ALL occurred between March 1, 2017 and November 30, 2017.  

Needless to say, it's been an incredible year for the risk-adjusted accumulation of wealth, across many asset classes but in particular equities.  As we’ve written about in past posts, the synchronization of numerous factors (growth in virtually all major economies, stronger corporate earnings, easy monetary policy, and ongoing low interest rates to name a few) have led to a stark increase in equity markets.  While these moves are good news for investors, they have resulted in two very common questions:  when is it all going to end and when should we get out?

Let’s take each of these in turn.  When is it all going to end (with “it” being the rise in equities)? 


It would be disingenuous to say we can answer this question 100% accurately.  What we can say is, based on our research and knowledge, we don’t see a bear market (defined as a 20% correction) in the near future.  The explanations of why that is are very involved – but at a high level, (1) there are little signs of a pending recession (from the economic data and the rate/direction of change in those data points), (2) earnings and growth remain strong and support valuations, (3) equities still offer an attractive return vs. other asset classes, (4) global central banks keep easing, which leaves US rates low and (5) cash still remains on the sidelines and is likely to enter equities after such a strong year, buoying demand.  While there could be corrections for other reasons (political events or geopolitical risks), as it relates to fundamental reasons, we don’t see one looming.  Keep on walking - you haven't reach the end of the road yet. 

Now, for the second question – when should we get out? 


This question we can answer with great certainty.  The answer: never.  Never?  How can that be?  Wouldn’t it be best to get out the minute we see signs of a recession and then get back in once we see things turn?  Wouldn’t a wise investor have exited equity markets in early 2007 and gotten back in March 2009.    Of course – that would be ideal.  But markets can’t be predicted with that level of precision and anyone that tells you they can time them that way is likely highly overstating the truth. 

The only way to build wealth over a long period of time is to set an asset allocation with a risk profile you can tolerate – even in down markets – and then stay the course.  That is no easy task.  That approach is not for the faint of heart.  For if you follow this approach, you’re actually reallocating funds to asset classes that have fallen (or will continue to fall) in value.  Much harder than buying on the way up.  So, to flashback to 2008/2009, you would have been adding to your equity category.  Much easier said than done.

Why do you have to stay in?  Simply because you never know which hours, days, weeks, months, of years are going to contribute the most to your aggregate returns over your investing timeframe.  As this chart from Charles Schwab shows, there is a drastic difference in returns from missing the top x number of trading days from 1997-2016.  As an example, if you missed the top 10 trading days (that’s 10 days in almost 19 years!), your annualized return is almost cut if half (4% vs. 7.7%).  If you miss the top 20 days, your return falls from 7.7% to 1.6%.  See what we mean?  Best way to avoid missing these important days – never get out.


Given the strength in 2017, this analysis is likely to have become even more pronounced.  Imagine if you had shifted away from equities in 2017 - you would have missed an incredible investing period.  The point is – you never know with 100% certainty what each day will bring, so you have to be on the course at all times.  Some sections of the trail are easier than others but in the end, it’s the entire journey that matters – not each spot along the path.

Invest on.  Trust me, it’ll be a worthwhile adventure.