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A Sideways Market for U.S. Stocks: Déjà vu All Over Again?

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Examining Sideways Market Conditions and Investment Strategies

Haven’t we seen this before?

A well-cir­cu­lat­ed chart made its way around the invest­ment world through­out 2015. It was a chart com­par­ing the S&P 500 in 2011 to 2015. With the excep­tion of a lit­tle less volatil­i­ty in 2015, the years are eeri­ly sim­i­lar when com­pared to each oth­er, even on a month­ly return basis.

Comparing 2011 to 2015 in SP 500 - Swan Blog

In both of these years, the mar­ket trad­ed side­ways from Jan­u­ary to Decem­ber, despite some his­toric volatil­i­ty and mar­ket swings in between. After a side­ways mar­ket in 2015, the focus shifts to what lies ahead and if the mar­ket will offer more of the same.

How Often do Markets Trade Sideways for the Year?

Sta­tis­ti­cian Ryan Det­rick recent­ly did some analy­sis of flat mar­kets, defined as less than +3% and bet­ter than -3%, and found these inter­est­ing sta­tis­tics:

  • The last time the S&P 500 was flat two straight years was 1947 and 1948 at 0.00% and -0.65%.
  • Using his­tor­i­cal data back to 1872, only 15% of all years end up flat.
  • 66% of all years move at least 10% (up or down). 28% of all years move at least 20% and 11% move at least 30%.

If you expand the def­i­n­i­tion of a flat mar­ket a lit­tle fur­ther out to +4/-4% and begin the analy­sis when S&P 500 data becomes more robust in 1926, flat mar­kets only occur 10% of the time, with nine occur­rences across 90 years. Of those nine, two hap­pened in the 1930s, two hap­pened in the 1990s, and two hap­pened this decade. They have nev­er occurred back to back and three flat years have nev­er occurred with­in the same decade. But this is just the S&P 500; what about oth­er equi­ty mar­kets?

The MSCI EAFE Index, rep­re­sent­ing For­eign Devel­oped equi­ty mar­kets, began in 1970 and over the past 46 years, its annu­al returns were flat 11% of the time. When look­ing at Emerg­ing Mar­kets, using the MSCI EM Index, which began in 1989, 11% of the time its annu­al returns were flat.

Mar­ket his­to­ry should nev­er be a means of pre­dict­ing future per­for­mance. What has hap­pened in the past does not mean the future will mir­ror it. But there are lessons to be learned by study­ing mar­ket his­to­ry and its mechan­ics if it can give us poten­tial insights on the like­ly dis­tri­b­u­tion of returns. From the data out­lined above, it is rea­son­able to con­clude that we should expect the equi­ty mar­kets to be flat around 10% of the time. So, we know that mar­kets will trade side­ways on occa­sion, but why and what hap­pens after?

Why Are Equity Markets Rarely Flat?

One pop­u­lar expla­na­tion is behav­ioral finance. Behav­ioral finance is the con­cept that investor psy­chol­o­gy caus­es mar­ket prices and fun­da­men­tal val­ues to diverge over peri­ods of time. Psy­cho­log­i­cal bias­es cause investors to under­re­act or over­re­act to new infor­ma­tion, as fear, greed, and emo­tion tend to dri­ve invest­ment deci­sions. But on a more fun­da­men­tal basis, economies, busi­ness­es, and pop­u­la­tions grow­ing or shrink­ing over time is what tru­ly dri­ves the mar­kets. As Ben­jamin Gra­ham famous­ly said, “In the short run, the mar­ket is a vot­ing machine but in the long run, it is a weigh­ing machine.”

There­fore, a flat mar­ket is usu­al­ly the result of some uncer­tain­ty in the mar­kets.

Uncer­tain­ty about eco­nom­ic growth, gov­ern­ment pol­i­cy, the geopo­lit­i­cal land­scape, and more, will influ­ence investor’s behav­ior and how they react to infor­ma­tion as it becomes avail­able. In 2015, the good news and bad news were pret­ty equal­ly weight­ed, and con­se­quent­ly, mar­kets end­ed up flat. How­ev­er, after a peri­od of flat­ness, the scales usu­al­ly tip one way or the oth­er and over­re­act­ing mar­ket par­tic­i­pants dri­ve the mar­ket up or down.

So How’d You Do in this Sideways Market?”

Now it’s time for a lit­tle intro­spec­tion…

For the Swan Defined Risk Strat­e­gy (“DRS”), flat mar­kets make for a less than opti­mal envi­ron­ment. Sim­i­lar DRS per­for­mance in 2015 and 2011 was not unex­pect­ed. In a flat mar­ket, the under­ly­ing invest­ment in mar­ket ETFs usu­al­ly doesn’t make any gains of sub­stance. In fact, in the case of 2015, our equal-weight sec­tor approach trailed the cap-weight­ed mar­ket by around 250 bps. More­over, there is a cost over the year asso­ci­at­ed with the invest­ments always being hedged. In a flat mar­ket, this hedg­ing cost is gen­er­al­ly in the 2–3% range.

It is impor­tant to note, how­ev­er, that the DRS can still be pos­i­tive in a flat mar­ket if the returns from the income com­po­nent of the strat­e­gy are close to its his­tor­i­cal annu­al aver­age return. In 2015, although pos­i­tive on the year, the income component’s return was below its his­tor­i­cal aver­age.


In sum­ma­ry, a flat year in 2016 is high­ly unlike­ly. Could it still hap­pen? Yes, it could, just as a big up or down move could hap­pen. But his­to­ry would say to be on the look­out for a big move.

More impor­tant­ly, 69% of the time since 1926 the S&P 500 has been up or down more than 10%.

These types of returns are usu­al­ly bet­ter envi­ron­ments for the DRS to either pro­tect on the down­side or cap­ture some of the upside of the mar­kets. Either way, the DRS is con­struct­ed in such a way as to max­i­mize the prob­a­bil­i­ty of suc­cess­ful returns over a long-term cycle by focus­ing on the 69%; pro­tec­tion and growth par­tic­i­pa­tion.

We believe that even if the mar­kets act abnor­mal­ly and stay flat for years to come that the DRS will be bet­ter posi­tioned than oth­er equi­ty approach­es for what­ev­er the mar­ket may bring.

Here’s to a hap­py and pros­per­ous 2016!

Also feel free to con­tact your Swan rep­re­sen­ta­tive at 970–382-8901, or vis­it our Con­tact page if you have fur­ther ques­tions.


About the author: Mic­ah Wake­field, CAIA®, Direc­tor of Research and Prod­uct Devel­op­ment, is a part of the invest­ment man­age­ment team at Swan and focus­es on research and analy­sis, strate­gic plan­ning, and prod­uct devel­op­ment. Pri­or to join­ing Swan, Mic­ah was the Direc­tor of Oper­a­tions and Trad­ing at an invest­ment advi­so­ry firm.



Impor­tant Notes and Dis­clo­sures:

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non-qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®). All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request. The S&P 500 Index is a mar­ket cap weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970–382-8901 or 001-SGI-010616   [/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

By |2018-10-09T16:36:01+00:00January 6th, 2016|Blog|Comments Off on A Sideways Market for U.S. Stocks: Déjà vu All Over Again?