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The S&P 500’s 14% Rally Explained in Just 8 Days

Visitors around the Charging Bull statue near the New York Stock Exchange, June 29, 2023.

Victor J. Bleu | Bloomberg | Getty Images

The S&P 500 is up 14% this year, but just eight days account for most of the gains.

If you want a simple indication of why market timing is not an effective investment strategy, take a look at the S&P 500 Index data year to date.

Nicholas Colas of DataTrek notes that there have only been 11 more days of up than down this year (113 up, 102 down) and yet the S&P 500 is 14% higher since the start of the year. ‘year.

How can we explain that the S&P is up 14% but that the number of up days is roughly the same as the number of down days? Simply saying “there was a rally in the large cap tech sector” doesn’t really do justice to what happened.

Colas notes that there are eight days that can account for the majority of the gains, all tied to the biggest stories of the year: big tech, the banking crisis, interest rates/Federal Reserve and debt prevention. recession:

S&P 500: Biggest gains this year

  • January 6 +2.3% (weak employment report)
  • April 27 +2.0% (META/Facebook shares rebound on better-than-expected profits)
  • January 20 +1.9% (Netflix posts better-than-expected fourth-quarter undergrowth and big tech rallies)
  • November 2 +1.9% (10-year Treasury yields fall after Fed meeting)
  • May 5 +1.8% (Apple profit solid, banks recover following JP Morgan upgrade)
  • March 16 +1.8% (a consortium of major banks made deposits with the First Republic)
  • March 14 +1.6% (banking regulators offered deposit guarantees to SVB and Signature Bank)
  • March 3 +1.6% (10-year Treasury yields fall below 4%)

Source: DataTrek

The good news: These big questions (large-cap technology, interest rates, recession avoidance) “remain relevant today and are the most likely catalysts for a new rally in U.S. stocks,” said Colas.

The bad news: If you hadn’t been in the markets for those eight days, your returns would have been much worse.

Why market timing doesn’t work

Colas illustrates a problem stock researchers have known for decades: market timing – the idea that you can predict the future direction of stock prices and act accordingly – is not an effective investment strategy.

Colas implies here that if an investor had not been present on the market during these eight best days, the returns would have been very different.

This isn’t just true for 2023: it’s true for every year.

In theory, investing money in the market when prices fall, then selling when they are higher, then buying when they are low again, in an infinite loop, is the ideal way to own stocks.

The problem is that no one has always been able to identify market ups and downs, and the cost of not being in the market on the most important days is devastating to a long-term portfolio.

I dedicate a chapter in my book, “Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange,” to why market timing doesn’t work.

Here’s a hypothetical example of investing in the S&P 500 over 50 years.

Hypothetical growth of $1,000 invested in the S&P 500 in 1970

(until August 2019)

  • Total return $138,908
  • Minus best performing day $124,491
  • Less the best 5 days $90,171
  • Less the best 15 days $52,246
  • Minus best 25 days $32,763

Source: Dimensional Funds

These are astonishing statistics. Missing just one day – the best day – in the last 50 years means you earn more than $14,000 less. That’s 10% less money – for not being on the market one day.

Miss the best 15 days and you’ll have 35% less money.

You can display this with virtually any year or time period. Of course, this works in reverse: not being in the market on the worst days would have generated higher returns.

But no one knows when those days will come.

Why is it so difficult to time the market? Because you have to be right twice: you have to be right in and out. The likelihood that you can make both decisions and beat the market is very low.

This is why indexing and market membership have slowly gained followers over the past 50 years. The key to investing isn’t market timing: it’s about investing consistently and understanding your own risk tolerance.

Gn bussni

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