Patterns and returns

Investors are supposed to be rational and markets are supposed to be efficient, which should lead to a truly unpredictable returns. But markets exhibit some patterns and cycles, that force us to add the words “most of the time” to the efficient and rational hypothesis. Take a look at the chart below. It shows a chart with 10 year rolling reruns for the S&P500. Your brain, is automatically trying to complete the chart into the future with a downturn, because that si what would make sense in that context. What dos it mean? The chart tells you that we have Goldilocks markets for 10 years, followed by lost decades. Since 2008, we’ve had a wonderful stock market, with periodic hiccups that pushed investors to Buy the Dip. Currently the 10 year rolling return is almost 16%. We can have a couple more years of bonanza (or more), but market “gravity” is starting to pull. It’s starting to behave like a “heavy” market. Perhaps that the reason the S&P500 keeps fighting the 7000 level. Monetary and fiscal policy can stretch the market a little bit more, and earnings continue to grow, but the law of large numbers starts to kick in, and it is incrementally difficult to keep growth rates. We’re still going up, until the trend is reversed, but if patterns hold (big if), we’re closer to the end than to the beggining. Risk management is going to become more relevant than usual.

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