As US stocks hit a 6 month low two weeks ago on October 15th, we wrote, "The CNN Fear and Greed Index hits "Extreme Fear" (but we're not selling...)". In hindsight that was a good call because US stocks, as represented by the S&P 500, rallied significantly over the next two weeks and closed at the 35th record high of the year on October 31st. The S&P 500 peaked September 18th at a record 2,011.18, but since fell 8.5%, which leaves the major average down 6.2% on the quarter and up just 1.6% on the year.

We commented specifically, "We don't fear the stock market, which goes haywire far more often than people remember. We fear our clients ordering us to do something stupid, like liquidate their portfolios. Fortunately, our clients have ridden through enough peaks and valleys at this point to be confident that this too shall pass. For any clients or prospects with cash on the sidelines, now would be a good time to invest, anyone who bought stocks October 16th would have gained 8.4% by month end, which is about what an investor would expect in a year. Or the investor could have earned 11.0% buying on January 1st. 

The obvious question is: why didn't we jump out September 15th, at the previous market high, jump back in on the 16th. The answer: stock market movements in any time frame of less than a month are completely random. Any market timing strategy we have ever looked at, after subtracting commissions and taxes, yields substantially less than "buying and holding." So boring, and yet so true.

What does drive non-random stock market trends? Revenues, earnings, earnings expectations and interest rates. A helpful way to evaluate a world event is to ask, "how will this affect the earnings of General Electric, Pfizer and McDonalds." For example, how will a terror attack in the Canadian Parliament House affect the earnings of GE. Not at all? Then we should buy GE when some idiot attacks a government building, not sell. Two weeks ago, there was a bunch of bad news on world affairs, but earnings were fabulous (and that's why stocks are at a new high.)

People are terrible at understanding risk. This table is a good guess of US mortality for 2014:

Cause of Death and Estimated # of deaths
Heart Disease: 600,000
Cancer: 575,000
Diseases of the lungs: 140,000
Stroke: 130,000
Accidents: 125,000
Alzheimer's: 85,000
Diabetes: 75,000
Influenza: 54,000
Kidney disease: 45,000
Suicide: 40,000
Drug overdose: 42,000
Car accident: 34,000
Firearms: 33,000
Bicycle Accident: 750
Hot Tub: 300
Police Officer: 150
Avalanche: 35
Lightning: 30
Terrorism (US CItizens worldwide): 20
Terrorism (US Citizens domestic): 5
Ebola: 1

So many other things will kill you ahead of Ebola, but because death from heart disease, the flu, or firearms is accepted by our society as a reasonable risk, we don't focus on these concerns at all. Ebola can be reasonably contained in the context of a modern medical system, but because it is scary and new, we way overreact. Applying overreaction to your stock portfolio WILL harm you in the long run.

Election night forecast

We projected months ago that the Senate would change parties, while the House remained in Republican hands. With hours to go in the polls, it seems very likely that the composition of the next Senate will be 52 Republicans, 47 Democrats, 1 Independent. We project that nothing gets accomplished in Washington over the next two years, and that the campaign for the US presidency switches into high gear November 5th.