Here is a recap of market performance for the month of April and year-to-date:
Stocks appreciated in April, with US large cap up over 5%, international stocks following close behind, and US small cap behind both. During this timeframe, bonds have rebounded and posted positive returns. Year to date, all stock categories are positive, and small cap stocks leading the way. Bonds are still negative on the year.
What To Do After Market Increases
As we’ve discussed in prior updates, stocks have had fantastic returns over the past year. While this is a good thing, it can cause investors anxiety about where the markets will go from this point forward. Most people are familiar with the phrase “buy low, sell high.” So after periods of positive returns, it’s tempting for people to consider selling investments and realizing a portion of their gains.
The following chart from Strategas Research sheds some light on the conundrum investors are currently facing. First, let’s define some terms:
- A stock’s 200-day moving average is calculated by adding all of the closing prices for the last 200 trading days, and dividing by 200. It’s used to smooth out volatility and determine the long-term trend.
- At any given time, a stock could be above or below its 200-day average. The horizontal axis is measuring the percentage of stocks in the S&P 500 trading above this average.
- When recent market performance is bad, many stocks are below their 200-day average. This is an “oversold” environment, represented by the red dots.
- The blue dots represent the opposite environment. When stocks are doing well, many of them are higher than their 200-day average. When this happens, the market is considered “overbought.”
- Each dot represents a period in time from 1981 through today. The vertical axis shows what the next 12 months returns were for each dot.
There are a couple interesting takeaways from this graph that may seem counterintuitive:There are a few interesting takeaways from this graph that may seem counterintuitive:
- The worst forward returns (markets down 20% or more) tend to occur during periods of already poor performance, not after positive performance like we’ve seen recently
- After periods of sustained strong returns, markets do typically correct, but rarely crash
The process of investing is always challenging. While down markets can be unsettling, it’s just as important to stay focused through periods of positive returns. We always want to help you progress toward your long-term financial goals. If you would like to discuss these topics further, please let us know.