Merriman INSIGHT – This too shall pass

The stock market has delivered a very volatile week to investors, perhaps striking a nerve not felt since 2008. As I write this, the S&P 500 has dropped more than 5% in a week and almost as much today, causing many investors to recall the sickening downturn of what some called “The Great Recession.”

Since 1980, the average intra-year decline for the S&P 500 has been -14.2%, even though annual returns were positive for 27 of those 35 years, or 77% of the time.

082415Chart

The S&P 500 has more than doubled in value from March of 2009 , and we have gone more than 1,400 calendar days without as much as a 10% correction. This is the third longest stretch in over 50 years without such a decline. Since 1928 the S&P 500 has experienced a 10% correction almost once per year with an average recovery of 8 months.

082415TableCorrections of 20% or more for the S&P 500 have historically occurred at the end of market cycles. In the short run the S&P 500 has pulled back 5% an average of four times per year, or about once per quarter. In fact, the S&P 500 has experienced a 5% or greater pullback every year since 1995. Drawdowns of 2%-3% occur far more often, at least monthly on average. As such, pullbacks alone should not be a reason for panic.

In times of increased volatility such as we have experienced, it’s important to revisit these important lessons that are the underpinning of a successful investment strategy. (more…)

Old Scheme, New Tricks

iStock_000027123745LargeInsider trading is not a new concept, but it continues to be a high priority for the SEC’s enforcement program because it undermines investor confidence in the fairness and integrity of the securities markets.

Individuals are getting more creative in looking for ways to cover their tracks. In 2014 the industry has seen everything from someone attempting to hide insider trades by using a relative’s account in a foreign country, to a man writing tips on post-it notes that he then literally ate to eliminate the evidence. Meanwhile the SEC is leveraging more technology tools than ever before to strategically detect illegal trading activity.

Put simply, insider trading is buying or selling securities while in possession of material, nonpublic information about the security. Insider trading in this context is illegal – you can’t profit from information that is not available to the whole market. It is also illegal to communicate (or “tip”) material, nonpublic information to others who may trade in securities on the basis of that information. All information is considered nonpublic unless it has been effectively disclosed to the public. Material information includes anything that an investor might consider important in deciding whether to buy, sell, or hold securities. For example: new product development, earnings reports, mergers & acquisitions, major personnel changes, obtaining or losing important contracts, litigation, or a big scandal.

Just an investigation, even without subsequent litigation, can be very costly both financially and personally. Penalties for insider trading vary depending on the severity of the crime, but generally include disgorgement (forced giving up of illegal profits) plus interest, civil fines of $1 million or three times the profit gained or loss avoided through the trade (whichever value is greater), criminal penalties up to $5 million, bar from serving as an officer or director of a public company, and imprisonment for up to 25 years.

You should never trade while aware of material, nonpublic information. If you receive a tip: don’t place any trades; don’t share the information with anyone; and tell the person who gave you the tip that it is insider information that he/she should not be sharing with anyone.