Just another quiet week in the office...
Wry & Dry's only way to review the past week is to focus on the critical reasons for the stock market volatility: emotion.
Yes, we knew that the
- market had been over-valued for some time
- largest companies were particularly over-valued
- Chinese economy was slowing
- US market was over-valued
- profit outlook for Australian companies was getting weaker
But instead of calmly absorbing the new information as it arose and adjusting along the way, the market gurus kept their faith in suspended reality. And then, whooshka! The emotion kicks in.
Allow W&D to remind readers that the reality is that, in the short-term, the share-market is driven by emotion.
For example, it could be the emotion that CBA's share price was going to reach $100. Or the emotion that companies could keep on paying out more in dividends than was earned in profits. Or, the other way, that China's GDP growth will shrink to negative.
Consider the below charts.
The first shows the monthly change in the All Ordinaries Index for this century to date.
Just look at those extreme moves. Certainly last month (noted in red) the market fell with all the ugliness of Bronwyn Bishop's hairdo in a rainstorm. Down 8%, the worst month since the GFC.
But that is what the market does: in the short-term it is all about emotion. It has to be that because it is not possible that the investment outlook for the aggregate of companies listed on the ASX changes by that much each month. It just doesn't.
So, now have look at 12 monthly returns, rolled every month, going back to 1937.
Some 12-month periods had amazing volatility. Again, does the long-term outlook for the aggregate of companies' profits change that much in a 12-month period?
Nuh. All you are seeing is short-term emotion.
Now consider what long-term investor should consider. The above chart of the 7-year returns (rolled monthly and annualised) makes much more sense. The volatility is much less. And note there are very few negative periods. But wait there's more! The above data excludes dividends. In fact there has not been a seven-year period when the market return including dividends has been negative.
W&D puts all this before readers so as to assure you that, in spite of what the media would wish you to believe, the world is not coming to an end. Since the late 1890s the share-market has returned an average of about 12% p.a. It just gets the conniptions now and then.