Mature Markets are Not Supposed to be Scary, Are They?

Donald W. Capone III CFA & John Kvale CFA

July 1, 2011


Depending on what time frame we want to use, the average annual mature market stock returns range in the 9%-10% level. Some time frames such as the latest 10 year period have been below the average, and time frames such as the 90s were above the average, but for the purposes of our discussion, our average return for stocks is 9%-10%.

Just as a person is expected, and usually does have more stable emotions, lifestyle, and generally living ways as he/she gets older and more mature, capital markets are the same. Frontier capital markets, which are markets that are too young to qualify as emerging markets, are expected to have juvenile like drama episodes within the government, residents, trading partners, and many time neighboring countries.  Juvenile Frontier capital markets are expected to have violent daily swings in their capital markets and most professional investors understand this.

So called mature countries such as the US, Europe, and Germany are classified as mature, if not elder statesmen, and are expected to have outgrown their juvenile ways.  As mature financial elder statesmen we should expect to have more stability on a day by day basis. Fluid trading, ease of entry and exit, and free flow of capital should in theory, stabilize and comfort investors in mature countries. Long term returns are expected to be much less than the juvenile kin, yet the ride is supposed to be much more comfortable and stable.

As of the last few years, we have felt that our mature ways may have gotten off track, and as such, we set out to discover just how our closest elder statesmen, the US markets have matured from a bumpy ride standpoint.

Since we all agree that for our time frame example we have an average annual stock return of 9-10% we wanted to determine how many days our markets have had +- 4% movements, using, you guessed it, our favorite stock index, the S&P 500 as our sample. Four percent at the onset of our research seemed like a huge number, and with a couple of days movement of this magnitude, would exceed our average stock returns for the year. 

What we found was very interesting and speaks loudly to the fact that we might all have a reason for higher blood pressure, and greater anxiety, as investors as of late, especially given the expectation of a slower moving elder statesmen country, but most importantly speaks to the need for careful portfolio decisions.

As a reminder, the S&P 500 was first published in 1957 and is an index of the elder statesman stocks in an elder statesmen country. Given the make-up of a mature index, in a mature country, we were not even sure there would be many 4% moves, as this type of movement is reserved for our juvenile frontier markets.

So here is what we found:

From 1961 to 2007or the first 46 years of our S&P 500 index’s measurement period there were 35 moves of 4% or more either higher or lower. Said another way there were less than one 4% move per year from 1961 to 2007.

Given what we now about elder statesmen markets we should expect to see this number continue to decline on a per year basis into the future.

Mature, but still juvenile:

From 2008 to 2010, we were surprised as professional investors to find that there were 40 movements of 4% in this 36 month time frame. Yes you did read that correctly, 40 times in 3 years versus 35 in the prior 46 years!

In a three year period of time as a mature elder statesmen, who is supposed to be highly looked up to by our juvenile, frontier market friends, we went from an average 4% movement of less than annually, to more than one 4% movement monthly!


We might learn several things from the most recent market movements.

1. Mature markets can and will become extremely volatile at times
2. Even elder statesmen may at times revert to juvenile ways
3. There is no guarantee this type of movement will stop in the future
4. Generally, investors may need to carefully consider portfolio risk allocations, if they have not already
5. If elder statesmen markets can have movement such as this, imagine what can happen to our Frontier and Emerging market friends (Often times these markets experience extremely good returns during the good times, however, the bad times can be terribly painful too.)


4% Capital Market Moves Detailed


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