Let’s play a word-association game. Stocks are up? Good! Stocks are down? Volatile! What’s missing is that a market that’s up a lot comes with volatility–the happy kind.
Earlier this year I detailed my rationale for why 2014”²s stocks should rise 20%-plus–largely based on sentiment and way too many folks in the herd foreseeing a moderate year. Forget my rationale. Consider instead volatility. Average returns aren’t normal. Normal returns are extreme (only when they are blended d o we get “average”). People may expect average, but they’ll rarely get it.
In the S&P 500”²s lifetime it’s been down 27% of all calendar years. But it’s risen more than 20% in over half the positive years. In other words, if you don’t get a down year, history favors huge! Years with positive returns up to 10%–what most folks usually expect (“average”)–happen only 15% of the time. More frequent (amazingly): years between 30 % and 40%. Markets love to surprise. They’re extreme.
Fact: Volatility is a perfect dual–edged sword. People just don’t feel melt-ups as volatility because they’re pleasant. Volatility it is, nonetheless!
As a year progresses slowly folks become ever surer of a moderate end point, which often morphs to a melt-up surprise. Bet on it.
How long is needed for a 20% run? Three months when the mood strikes but sometimes less. Those runs are similarly interspersed between early and late–stage bull markets. So fathoming forward, if you aren’t expecting a big negative, bet on huge.
