I just had an interesting conversation with Mike Panzner, Director of Institutional Sales Trading at Rabo Securities. Mike is a quant who has an interesting take on the markets.
Assuming the S&P 500 index finishes about where the markets are at the moment (i.e., 1263), that means they would be up ~4% for the year. In 2004, the SPX was up ~8.99%, and 2003, the SPX was up 26.38%.
This would mark the third leg of a 3-year winning
streak, with a median annual return of +8.99%. Over the past 50
years, there have been:
· four 2-year streaks
· five 3-year streaks
· one 5-year
streak· one 8-year streak
Streaks longer than 4 years are relatively unusual.
In fact, there were only two out of eleven occasions when the span of winning or losing years exceeded three consecutive winners over the past five decades. One of those two periods were during the late-1990s bubble years (1995-1999 ); the other was from the
beginning of the secular bull market that began in 1982 (1982-1989); Even 1987, the year of the crash was up 2.03%.
Under the circumstances,
that implies pretty good odds that 2006 is less than likely to be an up year, just based uon historical averages. Furthermore, on the
seven (out of nine) occasions when the market has had a 2 or 3-year winning
streak, the median return in the following year has been -11.36%.
Based on
the Business Week poll, the median return for the S&P
500 that analysts expect in 2006 — assuming we close this
month at 1260 — is +8.53%.
If history is any guide, it would seem that
most analysts are doing some wishful thinking, and less historical
analysis.
I will revisit this data with Mike after the year closes . . .
… but this time it’s different!
Heh. The so-called “analysts” who are like a herd running toward a cliff, are always the last to tell us what’s happening anyway.
does anyone keep track of analysts’ (either top-down or borroms-up) predictions so we can get a sense for how optimistic they typically are? and who’s the worst? (gotta be Abbie)
We know how unlikely it is to have a four-in-a-row streak when flipping a coin. So if I flip a coin 3 times, and it lands on heads three times, there’s no way it could land on heads the next time I flip it.
The multiple seems to be pretty stable, with neither pessimism or optimism taking old. So it’s probaby a corporate profits issue. Maybe we should be asking what are the chances that S&P profits are going to grow by less than 10-15%?
The key thinking behind this is that the US economy is still in the pattern of 4 year economic cycles.
But there are genuine reasons to think that the old pattern of 4 – year economic cycles has been broken,
If this is true then there is little reason for the market to follow the 4 year pattern as it did for the most part from WW – II to around 1980.
I am not saying that the 4 year cycles has been been broken. But there is enough evidence that you need to factor that possibility into your thinking.
this streaks history is a good comment. this is why, even though i am all in, i put a 67% probability (vs. higher) that all in is a good idea. also, the key word is diversified. all-in stocks does not mean the S&P 500 exclusively. Also, the qualifier that even in a down year 2006, the overall result all-in by end-of-year 2009 will probably be positive (based on streak analysis similar to your streak analysis above). So if you can hold until 2009 and rebalance periodically, all-in might not be too bad (especially if you are young, not so if you are old).
you also might go back to statistics and consider the idea of independent events. The probability of a head during any one flip is not altered by the outcome on a prior flip. Are market returns like a coin-flip or not? Are markets interactive or independent? You might find people who think markets are random and independent.
Actually the number of times the DJI has been up two years in a row since 1928 is 34. The number of times the DJI was positive the following year is 20. If you believe these statistics are invariant over the next year the DJI has a 60% probability of being positive.
If you assume a normal distribution reflects the underlying process governing the calculations described above the mean of 60% is well within the range of errors which is 43% – 67%.
Guess what? The market is pretty efficient over ALL time ranges and any combinations thereof.
Additionally:
The three year streak analysis estimates a 55% probability of a positive return with a range of 72% – 28%.
There are not enough events for anyone to make a reasonable statistical statement for the 4 and 8 year streaks.
A relatively easy calculation of the statistics suggests that 2/3 of the time the market will have no more than three up years in a row. Considering that traders such as Soros made their fortunes with even poorer odds than 66%, it seems perfectly reasonable to conclude that holding cash at this point is a reasonable proposition. In fact, a quick glance at P/E reversions/overshoots over the last 200 years makes me wonder if the Dow couldn’t go even lower than Barry’s prediction.
What I want to see, if anyone has it (here or at Realmoney), is the historical P/E of the NASDAQ. Considering that the QQQs still trade at 34 times earnings, it appears on the surface that tech stocks continue to be wildly overvalued.
to make soros returns you need big risk. you need to bet against the odds and win. i do not see how all cash for next year is betting against hte odds
i was heavily out of stocks by early 2000s. i am all-in stocks today. i am not you (education, age, risk utility). so this might not be good today.
someone once said diversification is the closest thing to a free lunch.
Weak argument at best.
The market basically moved sideways for 22 months ending in October. Do the data mining and you will find only a few instances of sideways markets for such a long time. The years after these long periods of sideways consolidation have been up big! One of the examples used above, from 1995 to 1999, was after a similar sideways consolidation.
Jack,
Check out this chart of the 1966 – 1982 markets —
http://bigpicture.typepad.com/comments/2005/09/djia_1966_1982_.html
rangebound for 16 years, but wth major jinks up and down.
The fact that the two longest streaks (5 year and 8 years) have been the most recent makes me wary of using prior decades as proxies for what might happen in 2006.
It seems to me that the era of asset inflation which got its start in the 80s has continued nearly uninterrupted in the 90s and now the 00s.
We are in the midst of the biggest global asset bubble in history. So there’s no reason to doubt that we can string together another few years of gains…or more.
But when this era ends, and it will, katy bar the door.
That is a great post and a great string of varied responses. A stimulating topic. Many right but differing answers.
Odds are definitely on the side of a correction both from a technical perspective, cycle perspective and China perspective. I would say that if we test 10,000 for the third time, we are likely going below. Historical precedence for doing so and the trading band is too tight to continue ad infinitum. I’m rather hoping we get a strong cleansing of this massive use of derivatives and hedge funds which I believe are artificially gating the volatility of the markets………until something in their models that wasn’t accounted for happens. :) LTCM?
I know you’ve written about the commies before Barry but I think China is a ticking time bomb. An country which uses an export-driven approach to take the pressure off of internal reforms. Oversupply, no opportunity for competition in govt controlled industries, social unrest, bad loan after bad loan creating that oversupply, overbuilding with a population unable to afford it, tensions rising with int’l partnersetc, investment markets a joke, corruption and no trust of internal banking system, etc, etc. For the most part, can anyone say Japan? Is now the time? Will China lead us down?
But this time things really are different. I expect 2006 to be a great year for the S&P with rising profits supporting even higher PE’s
Why? Because we have a Fed continually expanding the money supply with a new boss even keener than the departing incumbent to accelerate this policy. We have a president who doesn’t worry, or even care, about deficits, and bubbles abound in all asset classes.
Of course, the chickens may come home to roost in 2007, but nobody thinks that far ahead, maybe we’ll address this next Christmas.
The majority of the statistical statements above are invalid because the requisite number of events are not available in the sample used to arrive at the conclusion. This leads to measurements that have such a wide range of error as to make the results meaningless.
The business press, blogs and MSNBC are rife with very sloppy statistical analysis as displayed in this thread.
BR: Note — I don’t disagree . . .
Niederhoffer at DailySpeculations uses a Fed model to predict 19% next year. Of course those error bounds are bit large.
the Fed model is a best, a way to measure over/under valuation.
It seems to double count low rates — because they show up not only in Treasury Yields, but in Corp profits.
It is especially poor at turning points, or where rates rise appreciably.
What are the odds of 2006 being a positive year?
Here’s an interesting topic from Barry Ritholtz’s site, The Big Picture. Link: What are the odds of 2006 being a positive year?. I just had an interesting conversation with Mike Panzner, Director of Institutional Sales Trading at Rabo Securities. Mike
My portfolio of ETFs is almost exclusively ivested outside the U.S. Markets. The foreign markets in Latin America, Asia, and Europe have been outperforming our markets for some time. It will be interesting to see if any of the U.S. based ETFs will start to rise to the top in 2006. It will likely take more than an 8.5% move in the S&P 500 to make that happen.
What are the odds of 2006 being a positive year?
Here’s an interesting topic from Barry Ritholtz’s site, The Big Picture. Link: What are the odds of 2006 being a positive year?. I just had an interesting conversation with Mike Panzner, Director of Institutional Sales Trading at Rabo Securities. Mike