How's it going so far?

Wednesday, August 10, 2011

Has the Stock Market Hit Bottom?

Oh, if only there were a nice statistical way to answer that question! In the August 10, 2011 issue of USA Today, the article at offered a lot of insights from experts, but the authors were wise enough to know that there’s just no telling whether the stock market will rise or fall, or whether better days are to come yet.

For anyone who’s not aware, the Dow Jones Industrial average (DJIA) plummeted 535 points on Monday, following the bad news that the US credit rating had dropped from AAA to AA+, according to Standard & Poors and probably a multitude of other events that stripped investors of their confidence. The following day, August 9, the DJIA gained back 435 points, bringing it closer to pre-plummet levels. At this writing (Wednesday, August 10, 2011 at 1:35 p.m.), the Dow is down about 357 points.  

The insights offered by experts as to why the market is plummeting range from emotional sell-offs in light of the US credit rating downgrade, to the state of theoverall world economy, to the lack of warm fuzzies in Congress, but no one is making a the mistake of trying to predict the future. Nothing, not even statistics, can do that reliably.

Theoretically, even if somehow we were able to identify *all* of the factors (“variables” we call them) that make for fluctuations in the stock market, and then we found some realistic way to quantify each of the factors, we could come up with a [probably quite complicated] equation involving all of those variables that we could use to predict future behavior, but it would be just that – a prediction. You simply cannot use statistics to foretell the future. The best one can do is make a fact-based, educated guess.

Similarly, you cannot use the past to predict the future. Most of fall into this trap pretty easily. For example, a lot of people moved their investments to Treasury-related securities, because Treasury issues have shown a steadily upward trend without the volatility of riskier investments, like stocks. In fact, in the past 10 years, inflation-protected securities (TIPS) have out-performed the Dow, the Nasdaq, and the S&P 500 significantly…at about half the risk (as rated by Vanguard).  So are you rushing to your favorite investment site to move your money? If you are, then you’re using past performance to predict the future! Sometimes it works, but just as often it doesn’t.

Has the stock market hit bottom? Read the article, and you be the judge. Just trying to set your expectations about what statistics can and cannot do!

No comments:

Post a Comment