Where Do Stocks Go From Here?

“I skate to where the puck is going not where it has been.” – Wayne Gretsky

I just wanted to share a few pieces of interesting data I came across this week to put the current state of the markets into context.

The first table from The Capital Speculator gives you a sense of how the various markets and asset classes have performed this year through the beginning of August.

You can see that US stocks are the clear winner thus far. Bonds, emerging markets and commodities are all lagging or in negative territory.

The logical follow-up questions for investors in US stocks would be: Are we headed for a fall or will the good times continue?

Here’s another table, this one from Shaeffers, that gives you some historical context for this question:

These tables show the largest year to date gains through August 5 for the S&P 500, Dow Jones and Nasdaq for the stated time frames.

They say history doesn’t repeat, but it often rhymes.  If that’s the case, stocks could go either way from here.

Large gains often lead to momentum that carries the market higher than investors can imagine. But all good things must come to an end as markets can’t go up in a straight line forever.

Stocks average a 10% correction about once a year and it’s been about 14 months since we’ve had one, so don’t be surprised if there is some turbulence ahead.  That’s not a forecast, just a historical context.

You should never be surprised when stocks go down because that’s just what they do sometimes.  Preparing yourself ahead of time is a good exercise for when it actually happens.

There’s no need to take gains every time the market rises, but it helps over time to take some and readjust your portfolio occasionally.

Jeff Saut, from Raymond James, had an interesting analogy on this subject in his commentary this week called the ‘1 chip rule’ that’s based on an old gambling maxim. I’ll let him explain:

The ‘1 chip rule’ basically says that for every 10 chips you accumulate, you pocket 1 to pay yourself. In investing, the corollary is to take some profits as your investments run up higher.

That’s a pretty good explanation of a systematic rebalancing policy. Having a rebalancing policy in place within a defined asset allocation takes away the need to know what the markets are going to do from here.

Until I find a better way of implementing a long-term plan, that’s what I will continue to do. That way I don’t have to predict the next move up or down in the market.  I can use the moves in the market to my advantage, one way or another.

The Capital Speculator
Schaeffer’s Trading Floor
Raymond James


What's been said:

Discussions found on the web
  1. MG commented on Aug 10

    Hello Common Sense,
    Enjoy reading your thoughtful posts. I am somewhat confused by the Shaeffers charts. Why only a selective list of years? For all I know, the Return Rest of Year is actually higher than Return Through Aug 5 for the years not shown. Please clarify.


    • Ben commented on Aug 10

      Thanks for the kind words. That chart shows the highest returns from the start of the year until Aug. 5th for the past 40, 60 and 40 years for the S&P 500, Dow, and Nasdaq. And then what the returns were after those highest returns.

      So, this year the S&P is up 19.7% through Aug 5th and that’s the 6th highest return in that period of time in the past 40 years. The previous years when the market was up quite a bit through that time, most of the time there has been a follow through with further gains but there have been times where stocks have fallen after rising so far so fast.

      So it’s simply a historical look at what happens following a large stock gain in the first 7 months of the year or so. Not to say that’s what’s going to happen going forward, but that’s what’s happened in the past.

  2. MG commented on Aug 10

    Ok, got it now – thank you for the follow-up. I agree that a suggestion of trepidation may be called for.