Latest article on this topic is here: http://statisticalideas.blogspot.com/2017/05/caution-with-market-risk-strategies.html
Exercise vigilance! We’ve all heard the colloquial yet bizarre comment “what goes up, must come down." It is true today, as ever, under a spell-bound Trump rally. It was also true in previous frothy periods, such as just preceding to the 2008 financial crisis, or the irrationally exuberant internet-bubble of the late 1990s. And we have witnessed in recent months that the market has had little in the way of wild down-days, or wild up-days (here, here). Yet we also know that the Federal Reserve sees both weak economic projections now for Q1 GDP, with also stock market valuations as a concern. The chart below illustrates that wild market swings can still come as a result, quickly enough. In this chart, we see that this is the mildest first 4-months of the year, for any year going back >20 years! This YTD volatility is lower than even the full-year volatility, measured over those same couple decades. Further, in each of these previous 20 years, we ultimately saw at least two days during the year that ultimately claimed an appalling -1.5% drop, or worse. Yes, “records are meant to be broken” is a cute probabilistic expression, though it is unclear whether this rally is meant to be such a record. By a variety of accounts this curbed volatility seems like a special market situation, complementing the animal spirits that President Trump and others have jump-ignited. Even still, we do know -as usual and per recent market smashes (particularly in 2015)- that the market eventually turns down from these long positive stretches. And then it's painfully fast and horrifying.
Exercise vigilance! We’ve all heard the colloquial yet bizarre comment “what goes up, must come down." It is true today, as ever, under a spell-bound Trump rally. It was also true in previous frothy periods, such as just preceding to the 2008 financial crisis, or the irrationally exuberant internet-bubble of the late 1990s. And we have witnessed in recent months that the market has had little in the way of wild down-days, or wild up-days (here, here). Yet we also know that the Federal Reserve sees both weak economic projections now for Q1 GDP, with also stock market valuations as a concern. The chart below illustrates that wild market swings can still come as a result, quickly enough. In this chart, we see that this is the mildest first 4-months of the year, for any year going back >20 years! This YTD volatility is lower than even the full-year volatility, measured over those same couple decades. Further, in each of these previous 20 years, we ultimately saw at least two days during the year that ultimately claimed an appalling -1.5% drop, or worse. Yes, “records are meant to be broken” is a cute probabilistic expression, though it is unclear whether this rally is meant to be such a record. By a variety of accounts this curbed volatility seems like a special market situation, complementing the animal spirits that President Trump and others have jump-ignited. Even still, we do know -as usual and per recent market smashes (particularly in 2015)- that the market eventually turns down from these long positive stretches. And then it's painfully fast and horrifying.
Last we can see the market
performance for varying time periods in the rare cases where the Federal
Reserve has expressed concern about market performance. Not glorious in any way.
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