Wednesday, April 14, 2010

Playing the Odds - to no avail

As a manager of clients whose primary focus is on long term gains and security, I have focused on risk before growth. In the past year, that was an uncomfortable focus as the stock market went on an almost unparalleled tear. Looking at historical precedent and market valuations has been off the mark this time.

Looking back to the pre-depression 1920's and analyzing markets shows just how unusual this past year has been. Using rolling time periods of just over a year, there have been 4,237 different outcomes in the market. The current gain places this period ahead of ALL market performance periods except during the Great Depression. This fact does not imply that the next period will be either positive or negative but a regression to the mean will certainly occur. Trees don't grow to heaven.

(click on image to enlarge)

This market rally was exceeded only in periods during 1933, 1934 and 1936.

John Barnyak