“The Market ALWAYS Comes Back” and “You CAN’T Time the Market” Debunked

When a bear and a bull meet at a crossroads, a debate ensues. In the amateur world, the debate will end with the bull saying something along the lines of “the market always comes back.”

The first issue with this statement is that the time it takes for the market to come back is not specified.

Let me clarify that I am assuming that the bull would claim anytime is a good time to buy stocks, since the bull says, “The market always goes up over time.” This clarification allows me to illustrate some times the bull should have kept his or her mouth shut without the hindsight dismissal of “You cherrypicked the worst times.”

The best current example is the Nikkei 225. This is one of the headline indexes out of Japan. Immediately, those with the home bias of the US will say, “This is irrelevant. That is Japan.” Anyways, this illustrates that in the modern era a country’s major stock market index can exhibit an inability to “always come back.” If you invested in the Nikkei 225 in 1989, you are still underwater. It is now 30 years later.

Historical Nikkei 225
Historical Nikkei 225 (Log)

Below, is a historical Log scale chart of the S&P 500. If you had invested in 1929, it would have taken you 25 years to get back to even. If you had invested in 2000, and did not sell for a minuscule gain in 2007, then you would have been underwater for approximately 12.5 years. Also, I have attached the standard scale chart of the S&P 500 just to demonstrate the parabolic nature of the recent move and its similarity to Japan years ago.

Historical S&P 500 (Log)
Historical S&P 500

Next, I would like to stress an important point that is misunderstood by many. This point is the proper use of opportunity costs. Those who say you cannot take your money out of “the market” due to giving up on gains are confused. Opportunity cost is not a function of…

[Returns you could have had in the market-ZERO]

This function would be correct if the money that comes out of the market does not re-allocate towards anything at all. Cash is an allocation. If cash returns 2% (1.8% in 2018), and if the S&P 500 returns 10%, your opportunity cost is not 10% for being “out of the market.” Your opportunity cost is actually 8%. Also, I will not get into it, but cash is not the only alternative when getting out of “the market” as many seem to think.

The other camp that understands the market can take very large amounts of time to come back, may say “you can’t time the market.” This statement is said with so little backing. To those who make such a statement, have you ever even calculated the amount of time you have to time the market? I am simply going to use the past 2 cycles as precedent in the US for market timing abilities. I think this is fair, since if the bulls can extrapolate into the forever future, shouldn’t a bear be able to?

If you determined that the tech bubble of 2000 was a bubble, then you had a nearly a 6 year window to time it right. For example, if you exited “the market” in May 1997, then you could have bought in at February 2003 with no opportunity loss via “market” investments. Theoretically, you could have never invested in the housing bubble cycle, since the subsequent trough in the housing bubble cycle was lower than that of the trough of the tech bubble cycle. You could have even exited “the market” in December of 1996 and entered in February 2009 with no opportunity loss via “market” investments. That is a little over 12 years. If past is prologue, and the S&P 500 falls the average of the past two bubble cycles, then the S&P 500 will fall 48.6% (44.6% in 2000 and 52.6% in 2008). If the S&P 500 fell 48.6% from an assumed peak in September 2018, then it would land at about 1506. With that in mind, you could have theoretically sold in February 2013, with no opportunity loss via “market” investments.

I would like to leave those in the camp of the market always comes back with one last thought. Have you considered the risk that nominal “market” values come back, but real “market” values do not?