The Skeptic’s Guide to Stock Market Commentary

November 7, 2019

There are 1,000 ways to skin a cat, and there are 1,000 ways to spin stock market data to serve the interests of the commentator.

Let me ask you this: When you read an article about the stock market, how confident are you about the veracity of the numbers that the author is presenting? The purpose of this article is to give you a baseline of market facts that you can use as a guide to navigating the hyper-spin of today's market commentary.

Manipulating the numbers to spin the message is easy

The easiest way to manipulate numbers to make a point is by changing your time frame - your start and end dates. An unscrupulous commentator can make a lousy strategy look like a winner by fiddling with the start and end dates of his or her analysis.

Another favorite method of manipulation is using average annual returns instead of compounded returns. Average returns are higher than compounded returns, but compounded returns are what you will actually get.

Another is using nominal rather than real returns (after taking inflation into account). What good will it do you to grow your money at a rate that doesn't keep up with inflation?

Here are the plain, unbiased, unadulterated, spin-free facts about stock market returns that you need to know

There are things we know for sure. (Have already happened)
There are things we can be fairly sure about. (High likelihood of happening)
There are things we can only guess at. (50-50 likelihood of happening, at best)

Things we know for sure

Over he past 100 years, the stock market has produced an “average” yearly return of 8.2%.
If we include dividends, the “total” yearly return increases to 12.2%.
If we adjust for inflation, the “total real” yearly return becomes 9.1%.
Convert this to a compound annual growth rate (CAGR) and get the “true real return” of 7.22%.
These are the things we know for sure because they are included in the historical record.

Other facts that are less well known in general

The market goes up two-thirds of all trading days and down one-third of trading days.
The market is in “Bull mode" 59% of the time and in “Bear mode" 41% of the time.
The “true real return” of 7.22% comes from just 5% of all trading days in the market.
In the past 100 years there have been 1,323 new highs. That’s 5.03% of all trading days.
After a new high, the average market return over the next 12 months was 7.28%.

Stock market returns before, during, and after recessions

The market anticipates recessions and begins to decline before the recession arrives.
During economic recessions, the average market return is 6.0%.
When we include the 2 months before the recession arrives, the return drops to 2.1%.
Including the 4 months before the recession, the return is -2.7%.
From 6 months before the recession, the return is -7.6%.
From 8 months before, the return is -11.2%.
From 10 months before, the return is -13.6%.
Going back more than 10 months before the recession arrives, the returns start to improve.

Things we can be fairly sure about. (High likelihood of happening)

The stock market will start to go down several months before the next recession arrives.
The market will continue to decline until it begins to anticipate the end of the recession.
The next recession and bear market will be deeper and longer than average (Mean Reversion).
Central banks will not be able to stop the next recession from happening.
Retail investors will exit the market and not return until long after the bottom is reached.

Things we can only guess at. (50-50 likelihood of happening, at best)

Bonds will rise in price as they have done during past bear markets and recessions.
Consumer Staples will hold their value better than Consumer Discretionary stocks.
Utilities will hold their value better than Industrials.
The unemployment rate will spike.
There will be a rash of high-profile bankruptcies among highly leveraged companies.
Gold, silver, and other precious metals will rise in price during the coming recession.

Final Thoughts

I don't have a crystal ball, but what I do have is a particular set of skills (thank you, Liam Neeson). One of my skills is a deep understanding of market and economic history. When I hear a market pundit say "this time is different" I usually break out in a wide grin.

The modern version of 'this time is different' tends to center around the idea that global central banks will do whatever it takes to prevent, or at least soften, the next recession. To that I say... good luck. Sovereign debt is one of the biggest asset bubbles out there. And you're going to tell me that the solution to our global economic slowdown is to add even more debt to the pile? I'm skeptical.

In this article I've presented the facts about stock market behavior in the past, likely behavior going forward, and pure guesswork. It's up to you to decide how you will position yourself for the coming recession.

If you are willing to ride it out, you're not alone. But be honest. When you open your brokerage statement and your nest egg is down 25% from where it is today, will you shrug it off? I don't think it's very likely.

Sources: Robert Shiller, Yale University, YahooFinance; Standard & Poors

Related articles: Rarefied Air in the Stock Market

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About the author

Erik Conley

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

Pranay Mital says:

November 7, 2019 at 12:56 pm

Again very grounded. Coupled with the eco politico vagaries, the ability to deploy tactics to reverse or even come out of a recession may be even weaker than before. The winter is coming …could be long & icy !!

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