Learning from History—But Learning What?

It is a well-known aphorism: “Those who do not learn from history are doomed to repeat it.” And certainly, it is foolish to ignore the lessons of the past. Learning from our mistakes and the mistakes of others and also benefiting from successes are foundational to becoming wise, perceptive, and responsible members of society.

But in the financial markets, and particularly with equities, learning from the past can be complicated. Especially with the recent spikes in market volatility that have seen equity prices making both steep dives and breathtaking ascents, investors are looking for cues from past market performance to guide buying and selling decisions. But when we look at some recent instances of high volatility, the lessons learned seem more than a little random. Here are some examples.

In August 2015, the Chinese government made the unexpected announcement that it was devaluing its currency. Later that month, the Chicago Board Options Exchange Volatility Index (VIX) registered its highest readings since the Great Recession. This spike in market volatility triggered a selloff in equities amid fears of a difficult economy in China, the world’s largest importer of goods. Looking back at these events the lesson to traders was obvious: it was time to sell.

So far, so good. But then, in June 2016, the world awoke to the shocking news of British voters approving an exit of the European Union, giving us the new term, “Brexit.” Uncertainty over the vast global economic ramifications of Brexit sent the VIX to high levels. And then, in the months that followed, the S&P 500 rose by 8%. What did this event suggest? It was time to buy.

March 2018 saw the rise of trade tensions, as President Trump announced his intention to enact tariffs against Chinese goods coming into the U.S. and China retaliated by threatening its own round of duties against U.S. goods. Such saber-rattling between the world’s two largest economies couldn’t help but roil the markets, and the VIX reacted by moving steadily higher. No doubt, higher volatility combined with an uncertain trade climate and all the attendant economic implications would seem to indicate choppy waters for stocks, wouldn’t it? And yet, over the next three months, the S&P 500 reached all-time highs. In retrospect, the lesson in the volatility numbers was—Buy!

We could give even more recent examples of significant rises in the volatility index, followed by both drops and climbs in equity prices. But what is the larger point? Simply this: even those who make a living reading the “tea leaves” in the financial markets are often surprised by how the markets actually respond to specific situations. The only thing predictable about the financial markets is that they are notoriously difficult to predict. That, in fact, is the reason for the standard phrase included with most investment marketing materials, “Past performance is no guarantee of future results.”

Rather than trying to predict specific market moves, we work with our clients to position their investments as broadly and strategically as possible, according to their specific goals and risk tolerance. Over time, as scientific research has proven, this approach is demonstrably effective in helping investors reach their most important goals. Nevertheless, don't hesitate to contact us if you have questions about the markets and your portfolio.