Surprising Results

Reversion to the mean is one of the most persistent equity market characteristics. This concept refers to the tendency of prices to follow a long term average trend. While strong divergences either above or below the long term average do occur with regularity these moves have been consistently reversed as time progresses. Our latest example of this tenet is the behavior of equity markets over the past 12 months. After deep declines from last year's annual peaks in July, worldwide equity prices plunged for nearly 6 months interrupted by a modest rebound last December. At the early March lows, many broad indices had declined more than 50% from their most recent highs. Amid the pervasive pessimism at that point, a strong rebound was born that almost unbelievably carried through to the most recent market highs in mid-September. Not only did prices recover, the performance for many mutual funds over the 6 month period from March through August 2009 was among the best in their history. The attached file illustrates this point for the DFA component funds with histories of at least 10 years. What lies ahead? No one knows. Events of the last 12 months should amply illustrate the folly of translating current events into market predictions.

https://sites.google.com/site/dkepartners/files