Is the History-Making US market Building to Another Infamous Black Day?

Dear Reader,

This has to be one of the DUMBEST, MOST USELESS pieces of research ever produced by an institution.

During the March 2020 meltdown, CNBC reported on a Bank of America study that found (emphasis added):

Panic selling not only locks in losses but also puts investors at risk for missing the market’s best days.

Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.

The firm noted this eye-popping stat while urging investors to “avoid panic selling,” pointing out that the “best days generally follow the worst days for stocks.”

This is the old ‘if you missed the 10 best days’ AND ‘time in the market, not timing the market’ rubbish that gets trotted out whenever the industry is threatened with an outflow of funds.

This propaganda, dressed up as research, is damned by its own finding…best days generally follow the worst days for stocks.

Let me get this straight. You have to endure the worst days to experience the best days? That’s seriously warped thinking.

Do these researchers not understand simple maths?

A market that falls 50%, has to have a ‘best’ day of 100% to make my dollar whole again. Wouldn’t it be better to avoid the ‘worst’ day?

Why does the industry conveniently airbrush out of existence the worst days? The reason is the true picture is not nearly as pretty for marketing purposes.

Instead you get these sorts of self-serving charts that are so misleading it’s not funny.

Port Phillip Publishing

Source: Fidelity Investments

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To the untrained eye this data looks like an open-and-shut case for ‘time in the market’.

However, there are a couple of things worth noting about this data.

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Firstly, it picks the period from 1980 onwards. The trick here is to make you believe a 40-year period is more than sufficient time to qualify as the ‘long term’.

On the surface that is true. Until you realise this has been the MOST exceptional 40-year period in market history.

Port Phillip Publishing

Source: Macro Trends

[Click to open in a new window]

Since January 1980, the S&P 500 Index has risen 30fold.

For 40 years, the US market has been in the most celebrated of bull markets.

Propelled higher by historic levels of personal, corporate and public debt, lower and lower interest rates AND gross manipulation by the Federal Reserve.

For a little context, the previous 30fold increase in the US market (as measured by the Dow Jones Index) took more than 75 years to be achieved…rising from 35 points in 1904 to over 1,000 points in 1982.

Despite what the industry might tell you, this chart is anything but normal. It’s a freak period of performance achieved by artificial means.

The $64 question is, can it be continued? And if you think it can, then how? More debt? Even lower rates? More money printing?

Japan tried all of that after its bubble burst in 1990. And no amount of ‘best days’ could stop the Nikkei 225 Index falling 75% over a 20-year period.

Now back to the industry ‘research’.

This is what the industry DOES NOT want to show you…the period prior to 1980. Here’s the ugly cousin the industry hides in the cupboard.

Port Phillip Publishing

Source: Macro Trends

[Click to open in a new window]

From 1966 to 1980, the S&P 500 Index was on a road to nowhere.

Over that entire 14-year period, the S&P 500 struggled to notch up a 1% per annum.

Hard to build a marketing story around that data. Who would want to buy that pig?

Is this the sort of market you would want to spend time in? Not really.

It’s quite evident that during this period the market’s best days most definitely did not make up for its worst days.

Secondly, we know from funds flow data (money moving in and out of managed funds) the majority of investors buy towards the top of a rising trend…as the market is cresting towards its worst day.

Performance data going back to 1980 — while factually correct — is not a true reflection of the average investor experience.

Most suffer the worst day first.

This next chart is a real doozy. I cannot believe someone had the cheek to publish it. But publish they did. This one puts the cherry-picked data right on top of the industry’s marketing cake.

Port Phillip Publishing

Source: Fidelity Investments

[Click to open in a new window]

Each of these ‘Subsequent 5-year Return’ examples are AFTER the US market has suffered its worst performance period.

But what about those poor saps who believed the marketing BS and had spent ‘time in the market’ BEFORE these five-year periods of stellar performance?

When you think this insult to our intelligence could not get any worse, the five-year period from July 1982 conveniently ends in July 1987…three months prior to the 1987 crash.

And, the five-year period from December 1994 ends in December 1999…just months before the dotcom bubble burst.

Talk about timing the market to perfection. But we’re told you can’t time the market, unless of course you work in the industry’s marketing division.

The industry has no shame when it comes to creating these myths.

This is a question every investor needs to seriously consider: Is the history-making US market building to one of those ‘Black’ days…like Black Monday or Black Thursday?

If it is, then those Black days matter.

1929 — Black Thursday and Black Monday

On Black Thursday (24 October, 1929), the Dow Jones lost almost 13% of its value. Two trading days later, on ‘Black Monday’ (28 October), the Dow suffered a further 13% fall.

Port Phillip Publishing

Source: Trading Investment

[Click to open in a new window]

These ‘worst’ days were followed by ‘best’ days, but the market’s best was not good enough.

Over the next two and a half years, the Dow lost nearly 90% of its value. It would take 25 years of ‘best days’ for the Dow to recover…

Port Phillip Publishing

[Click to open in a new window]

1987 Black Monday and Black Tuesday

I remember it like yesterday. The mood in the office was part disbelief and part wonderment at witnessing a moment of market history.

Port Phillip Publishing

Source: Yahoo Finance

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It was Black Monday (19 October) when the Dow plunged 23% in value. The next day, it was Black Tuesday in Australia. The All Ords dropped 25%.

A decade later, the All Ords finally produced enough ‘best’ days to surpass its October 1987-high.

Despite what all the self-serving industry drivel tells you out about ‘10 best days’ and ‘time in the market’, market timing is crucial to your long-term financial well-being.

Would you have rather invested prior to or after 1929? Would you have rather invested prior to or after 1987?

Black days matter.

And I have a feeling we’re nearing another infamous Black day on Wall Street and when it hits, all that BS about ‘time in the market’ won’t matter for diddly.

Stay tuned tomorrow to see how avoiding the ‘worst’ days gives you a better outcome than being there for the ‘best’ days.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion