In light of current events in Ukraine, today's special edition to the Dunham blog gives some perspective on how the beginning of a war back in 1991 could have resulted in what we call Emotional Market Timing. It's important to remember that no two markets are the same, and past performance does not indicate future results. However, is there a lesson to be learned from Operation Desert Storm?
We define Emotional Market Timing as when an investor, nervous about domestic, world, or market events, in essence, panics and engages in an almost spontaneous act of selling their investments.
While every market is different, and past performance is not an indication of future results, as we see it, Emotional Market Timing may not be the ideal strategy to use when dealing with stock market fear because it centers on alarm rather than conscious rational action.
We feel the key to grasping the dangers of Emotional Market Timing lies in the understanding that, in our view, markets will generally rise and fall in cycles, typically moving in large chunks, and many times in what we consider to be short periods.
One of the critical difficulties in utilizing Emotional Market Timing is that the market does not always act as expected. It is difficult to determine when to move out of the market and when to get back in.
In this edition of the Emotional Investor Series, we will examine the stock market’s reaction to Operation Desert Storm, which was the first major foreign crisis for the United States after the end of the Cold War and the first major war for the United States after the Vietnam War.
On January 16, 1991, the United States and several other nations announced that they were going to war against Iraq, launching Operation Desert Storm. Iraq’s army, the fourth largest at the time, was well-equipped due to the massive military aid provided by the United States during Iraq’s eight-year war with Iran.
Iraq’s response included launching Scud missiles at American military barracks in Saudi Arabia and attacks on Israel while trying to persuade neighboring Arab nations to join the Iraqi cause against the U.S.-led coalition.
As we recall, stress and uncertainty ran high on January 16, 1991, and weighed heavily in the following weeks.
As this was occurring, the U.S. stock market was experiencing its own stress and uncertainty. On January 16, 1991, the day Operation Desert Storm began, the U.S. economy was mired in a recession, and the stock market was coming off a negative year for 1990.1 In fact, from July 19, 1990, through October 11, 1990, the S&P 500 lost - 18.38% in that short three-month period.2
Would the emotional market timer have sold out of their equity portfolio after it lost value during the recession in 1990? Would the Emotional Market Timer have been an investor on January 16, 1991, as the United States announced its military initiative in the volatile Middle East?
Interestingly, from January 15, 1991, the day before Operation Desert Storm was announced, through February 15, 1991, the S&P 500 was up a whopping 17.63% in only four weeks, erasing a nice portion of the losses suffered in the 1990 bear market.2
Remember, in our view, markets will generally rise and fall in cycles, typically moving in large chunks and many times in what we consider to be short periods. In fact, in 1991, the S&P 500 was up 30.47%, the beginning of one of the best bull markets in history.2
The point is, if you allowed Emotional Market Timing to guide your investment actions, you might have sold out of stocks after the market lost value during the recession. Then, based on the headlines about the negative returns on stocks, the recession, and the war in the Middle East, you may have stayed on the sidelines long after the market began its rally.
We speculate that the Emotional Market Timer may have missed the 17.63% return for the S&P 500 four weeks after Operation Desert Storm began and might have missed the entire 30.47% return in 1991.
Events like Operation Desert Storm typically create headlines containing fear and consternation. It is natural for investors to get nervous. In this case, we saw how missing the first four weeks of Operation Desert Storm may have led to a loss of valuable investment return.
This is why in our view, because the markets will generally rise and fall in cycles, typically moving in large chunks and many times in short periods, Emotional Market Timing may not be a prudent strategy to employ.
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¹Source: The National Bureau of Economic Research
²Source: Bloomberg and Dunham & Associates Analysts
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The S&P 500, or the Standard & Poor’s 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 Index components and their weightings are determined by S&P Dow Jones Indices. It differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. You cannot invest directly in an index.
A bull market indicates a sustained increase in price, whereas a bear market denotes sustained periods of downward trending stocks - typically 20% or more. The term “bull vs bear” denotes the ensuing trends in stock markets - whether they are appreciating or depreciating in value - and what is the investors’ outlook about the market in general. Bull markets generally coincide with periods of robust economic growth; investor confidence is on the rise, employment levels are generally high, and the economic production is strong. During the bearish phase, companies begin laying off workers, leading to a rise in unemployment and, consequently, an economic downturn.
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