Updating the Perspective on the Performance Trend
Whenever breathless headlines shout danger and destruction for the stock market, my first reaction is to fire up R to update the perspective on the performance trend.
After yesterday’s sharp correction in the S&P 500(NYSEARCA:SPY), which extends the recent downturn and leaves the index at a one-month low, it’s time again for a reality check if only to keep behavioral risk from running amuck.
There are many ways to focus on signal and minimize noise when assessing market activity, but I like to begin with the rolling one-year return. It’s far from the last word on risk and return analytics, but it’s a great place to start because it filters out a lot of the short-term noise while at the same time reflecting the lion’s share of return volatility(NYSEARCA:VXX) that moves prices through time.
The first chart below shows how the S&P’s rolling one-year return stacks up relative to recent history (since 2015). The main takeaway: the current 7.7% one-year gain is middling. Although there’s a wide range of results through time, the current performance is in line with long-term performance.
Sign up for our Newsletter & get the FREE eBook
Retirement Day Trader:
How to Sell Weekly Options for Steady Income
Does the perspective change when we look back over the past 60 years? No. Rather, it’s more of the same. The current 7.7% increase over the trailing 252 trading days is more or less what you’d expect to see most of the time.
Another way to visualize one-year returns is by looking at results through the prism of the distribution. As the next chart shows, the current one-year gain is radically normal for results since 1960.
For one last bit of perspective, consider rolling one-year returns from the perspective of Z-scores, which measure how far data varies from its mean. Basic statistics tells us that for a normal distribution data points will vary by 2 standard deviations from the mean 95% of the time and variation will fall within 3 standard deviations in 99.7% of the observed results. Stock returns aren’t normally distributed and so this lens is only a starting point for analysis, but it’s useful for some quick, initial perspective. With that in mind, the chart below reaffirms what we saw above: the current one-year performance is a bit of a yawn.
The key message is that there’s nothing particularly unusual about the latest one-year change in the S&P. You must forgive the usual suspects for overlooking this reality since it’s quite boring as equity market stories go. But don’t worry: far more dramatic results are coming, as the chart above remind. The only mystery is with timing.