The Math Is on Investors’ Side

wheels up airline industry

Most baseball fans know that the New York Yankees is the winningest team in MLB history. Of the 18,426 games it’s played since 1901, it’s won 10,378, or about 57 percent of them.

The Yankees have also won the most World Series championships. Between 1903 and 2019, the team has lifted the Commissioner’s Trophy a record 27 times, a win rate of 23.5 percent. (The 1994 World Series was cancelled due to a strike.)

As impressive as this track record is, it doesn’t come close to the U.S. stock market’s.

Over the past 90 years, the S&P 500 Index has ended the year up 61 times, for a win rate of 68 percent, or a little more than two-thirds of the time.

This means, of course, that the market has statistically ended the year down one out of every three times. It’s even rarer for it to sink lower two or more years in a row. This happened in the periods 1929 – 1932, 1939 – 1941, 1973 – 1974 and 2000 – 2001.

The implication of all this is that it’s historically been a winning strategy to bet on high-quality U.S. stocks over the long term. As I shared with you last month, there have been only three major instances when the S&P 500 delivered negative returns for the 10-year period—the two most notable being the Great Depression and the Great Recession. Had you cashed out during any other period after holding your S&P stocks for 10 years or longer, you would have seen a profit.

Thursday’s Stock Correction Was a Non-Event, According to Math

You can probably guess where I’m going with this. Stocks had an incredibly volatile week, following the best 50-day rally in S&P history. On Thursday, the market sold off close to 6 percent, its worst one-day trading session since March 16. The only stock to end in the black was Kroger, essentially flat at 0.4 percent.

Some wonder if we’re in store for a new bear market.

Analysts at LPL Financial addressed this very topic this week. Stocks were extremely overbought, up an astounding 4.78 standard deviations for the 60-day rolling period over the past five years. This flashed a screaming sell signal, and according to the math, a substantial pullback was expected.

market looks due for a short term correction
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The rally that ended on Thursday was “one of the greatest surges off a major low ever,” according to LPL. And when this happened in the past, a drawdown was “perfectly normal.”

Between 1957 and now, in fact, the average drawdown after such a move was minus 10.3 percent. The median drawdown was minus 9.3 percent.

The correction, in other words, was expected. Mean reversion is a powerful indicator we regularly use to detect buy and sell signals.