Markets Do Not Operate on the Calendar

Markets Do Not Operate on the Calendar

Posted on December 28, 2015

Weekly Update


Market State 10A – (4 trading days) Transitional/Bear Market State: The Portfolio Thermostat has been in one of the “Transitional/Bearish” Market States for the last 87 trading days, beginning on August 20, 2015 when a shift occurred from Bullish - Market State 2 to Transitional - Market State 6.

Canterbury Volatility Index (CVI 85) – Bearish: Volatility, as measured by the CVI, remained about the same last week but has been increasing since the beginning of December. The Portfolio Thermostat’s volatility indicators are issuing a “caution” reading.

Overbought/Oversold indicator is 72% oversold versus 80% oversold the week prior (Neutral/Bullish). An “oversold” (bullish) reading of 95% or higher is considered to be an extreme level.

Market Comment:

The S&P 500 gained 2.5% last week, with the majority of the gains coming from the most beaten down sectors, specifically Energy (up 4.73%), Basic Materials (up 4.35%), and Industrials (up 3.32%). Oil, meanwhile, finally got a 10% “dead cat” bounce, which means oil is now only down 37.22% from its 52 week high, instead of 41.36% from the previous week.

Most major market indexes are either slightly or significantly down for 2015. The following charts show an assortment of indexes and asset classes, year-to-date:

Source for all charts AIQ.

What is the takeaway for 2015?

Random fluctuation is unavoidable and not always meaningful. Though emotionally trying, markets don’t operate on a monthly, quarterly, or annual basis. The measure of its performance is based on an annualized compounded return over an investor’s lifetime. Therefore, it is all well and good to say the average expected returns are between 8% and 12% but history shows that such a predictable range rarely occurs in a given year. The truth is that the market’s “annual return” on December 31st is typically much lower or higher than what one would expect.

U.S. Stocks from 1871 through 2014 (143 years):
Average Annual Return (including dividends)  10.77%
Average Annual Compounded Return (including dividends)  9.11%
Annual Standard Deviation (risk)  18.82%
Source: Robert Schiller, Yahoo Finance and

How many of those years would you think that the U.S stock market finished at an expected return between 8% and 12%? Answer: 9 years out of 143 years or only 6.3% of the time.

2004: 10.82%
1993: 10.17%
1968: 11.03%
1959: 11.59%
1948:   9.51%
1926: 10.15%
1916:   8.12%
1902:   8.28%
1872: 11.16%

Canterbury’s studies show that markets fluctuate randomly. However, these fluctuations do occur within a range of probabilities, defined by the Portfolio Thermostat’s Market States. In other words, random systematic market risk, during Bullish - Market States 1 through 5, should be limited to a normal “bull market correction” in the 10% range. All other Market States (Transitional or Bearish - Market States 6 through 12) have potential peak-to-trough decline risk of 50% or greater (3rd standard deviation events).

Bottom Line:

Do not expect to end a year at or near the average “expected” return of 8% to 12%. That is just not how markets or portfolios work. A successful portfolio management system recognizes that random fluctuations are an inherent characteristic of the markets, and, therefore, imposing superficial time horizons on them will only serve to confuse and create false expectations. The issue is not how much and when the markets go up and down. The issue is limiting the portfolio’s corrections in order to produce compounded returns over a lifetime.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.