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Here’s Why You Shouldn’t Regret Not Going To The Recent Stock Market Rally

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Writer Brett Arends pointed out marketwatch.com, that a few CEOs like Josh Brown believed the rally was a loss on long-term returns.

Arends shared 5 reasons in an article published February 24, 2019, about why you shouldn’t feel bad about missing out on the recent stock market rally:

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1. You Haven’t Really Missed that Much

“Sure, if you’d bought and held you’d have been sitting in stocks during the boom since Jan 1. But you’d also have been sitting in stocks when they tanked last quarter. The Dow Jones more than 2,000 points this year, but it fell more than 3,000 in the fourth quarter. Even after the rally, the Standard and Poor’s 500 is still 6% below last September’s peak. Average level on S&P 500 during 2018 was 2,744 says FactSet. Today it’s 2,745. It’s a wash. Meanwhile, the rest of the world has done even worse. The MSCI All-Country ex-US index ACWX, +0.67% is still 12% below its 2018 average.”

2. Nothing has really changed

“Stock markets around the world plunged last quarter. The Dow fell more than 3,000 points, and the MSCI All-Country World index ACWI, +0.56% dropped nearly 14%. Wall Street experts argued there were some good reasons: Economic slowdowns in China and Europe, rising interest rates, trade war fears, looming conflicts… Today? Economists and other observers agree most or all of this is still happening. Corporate earnings may be heading towards a recession. As for interest rates: Yes, U.S. Federal Reserve chairman Jerome Power has put short-term rate hikes on hold, but most economists say the key figure in finance is the rate on 10-year Treasury notes, which he doesn’t control. That rate on December 31: 2.69%. Today it’s 2.69%.”

3. Sidelines for good reason

“The S&P 500 has only just – on Tuesday – got back level with its 200-day moving average, after spending two months below it. For anyone concerned… this is a key number. Financial historians have found that…one of the most sensible things any long-term investor could have done was to stay clear of U.S. stocks when the S&P 500 was below its 200-day moving average. That would have saved you the worst bear markets, while keeping you invested during most booms. You’d have actually ended up making more money, for a lot less risk, than someone who bought and held. FactSet data shows it’s also been true, for example, in the Japanese bear market since 1989: While Nikkei 225 remains barely half its 1989 peak, someone who was in the market only while it traded above the 200-day moving average would actually be heavily in profit over that time.”

4. Smart About Current Risks

“From the viewpoint of long-term investment, major risks remain according to some long-term strategists. Yes, conventional wisdom on Wall Street tells you that stocks are likely to gain an average of around 9% a year. And yes, that’s based on the historical average going back to at least the 1920s. But, say some financial historians, that’s a misreading of the past. Stocks, they say, typically produced “average” returns if you bought them at roughly “average” valuations in relation to things like net assets and net income. And U.S. stock valuations today, they warn, are anything but average.

According to “PE” data tracked by Yale University finance professor Robert Shiller, the S&P 500 is about 75% above its historical average valuation. “Ten year forward average returns fall nearly monotonically as starting Shiller P/E’s increase,” warned Cliff Asness of AQR in a 2012 paper that studied the S&P 500 going some time. He added, “as starting Shiller P/E’s go up, worst cases get worse and best cases get weaker.”

Today’s level? …we’re in the most expensive 10% of starting valuations, according to Asness’ data. “Average” 10-year returns from here? Based on history it’s about 0.5% a year after inflation, he calculated.”

5. Many big ‘up’ days were during bear markets

“The biggest ‘up’ days on the market have historically accounted for a big chunk of long-term returns. “One of the most common rhetorical bulwarks in the defense of buying and hold investing to demonstrate the effects of missing the best 10 days in the market, and how that would affect the compounded return to the investor,” Cambria Investments manager Meb Faber pointed out in an in a recent research paper.

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He warns, “This is perhaps one of the most misleading statistics in our profession.” Why? Many big “up” days took place during bear markets when the smart move was to be on the sidelines, he says. Missing the worst days was just as good for your wealth as catching the best one, he found… He calculated the 1% best days gained you, on average, 4.9% each. What about the worst 1% of days? They cost you about 4.9% each.”

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