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Something is wrong if you're losing sleep over a 1% decline in stocks

The most peaceful market in history ended on Tuesday as the S&P 500 suffered a 1% decline intraday. At 64 trading days, the streak was 30 trading days longer than the prior record set in 1995.

The S&P 500 also finished down over 1% on the day, ending the longest streak since 1995 without a 1% down day.

With these streaks over, does that mean the market has to go down? Not at all; there is no such thing as has to in markets, only probabilities.

Forward returns following the end of prior low volatility streaks have actually still been positive on average. That’s not to say the market can’t go down from here (it can), just that one should not expect that outcome based on an end to these streaks alone.

What market participants should expect, though, is to see more 1% moves going forward, both up and down. The start of 2017 has been an outlier in that regard. The average year since 1928 has seen 29 days with a decline of more than 1% and 31 days with an advance of over 1%.

That means on average, a 1% move is occurring in roughly 1 out of 4 trading days. But that is just a simple average; there is wide variation from year to year. Back in 2008, we saw 1% moves in 1 out of every 2 trading days. In the lowest volatility year in history, 1964, we saw 1% moves in only 1 out of every 84 trading days.

Will 2017 prove to be more volatile going forward? I don’t know, but it is likely that it will be, as volatility is mean reverting. More important for investors, though, is understanding that 1% moves in stocks are perfectly normal. As an investor in equities, you should expect them to occur with some frequency.

If you lost sleep this week because of the 1% decline in the S&P 500, you are likely holding too high of a percentage of equities in your portfolio. Remember, the average year (since 1928) has between 3 and 4 corrections greater than 5%. Since March 2009, we have seen 21 such corrections, the last occurring just before the election.

There will be another correction. That much you can count on. Controlling your emotions during such times can only be done if you are holding a portfolio that allows you to sleep at night. The time to do something about that is before, not after, volatility rises.

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.