January 2016—putting it in perspective

You may recall a couple weeks ago that my mother-in-law, Mimi Ocelot, wrote an email expressing concern that the stock market was going to hell.  It was pretty understandable.  Two weeks into the new year and stocks had fallen 9%.  Wow!!!

Now that the month is over, let’s take a look at things and try to put them all in perspective.  How bad was January 2016 for investors?

 

Remembering the first two weeks of January

First, let’s just quickly recall how the month started.  After two weeks it was down 9% and then by Tuesday of the third week, it dropped even more, bottoming out at 11% below where things started for the year.  As you may remember, we looked at how bad that those first two weeks were from a historic perspective.

Since 1950, there had been 19 other two-week periods that were as bad as the first two weeks of January.  One way to look at it is there have been 1716 two-week periods since 1950 (66 years times 26 two-week periods per year).  So if 19 of those 1716 two-week periods were worse, that means things were worst about 1.1% of the time.  Any time something is in the 99^th percentile of badness, that’s a big deal.

It was a tough couple weeks with everyone on TV has having a hissy fit about how the stock market was just terrible and all sorts of other crap.  And then this happened . . .

 

How the month ended

As I said, the third week started tough, dropping another 2%, but then things started to turn around.  By the end of the third week the market had gained 4% off its lows, finishing only down 7% for the month.  In the fourth and final week of the month, stocks had another good week, increasing about 1.5%.  So after all the carnage, stocks finished down about 5.5% for the month.

A month that is down 5.5% is obviously not a good one, but how bad is it really?  If you look at that same data from 1950, there are 792 months.  How many of those 792 months do you think were worse than January 2016?  If you guessed 66, you’re a winner!!!  66 seems like a lot actually.  That’s about 8% of the time.

Hmmmm.  66 months have been worse than this January.  66 times over 66 years.  That means that on average we have a month this bad once a year.  The last time we have a worse month was August 2015, and before that was May 2012, and then both August 2011 and September 2011.  How many of you remember any of those months as being really bad months for investing?  I’m guessing no one, and that’s the point, right?  During the time, it was probably bad, but then we moved on and the stock market continued its relentless upward trend.

Of course things are never steady and predictable with the stock market.  From 1990 to 1997 we had an eight year streak without a month as bad as January 2016.  Other recent streaks were five years starting in 2003 and most recently a three-year streak starting in 2012.

Conversely, in the depths of the Great Recession, in a six-month period starting in late 2008 there were FIVE months that were all worse than the one we just had.  Five out of six is bad.  OUCH.  And you know how that ended—everyone freaked out but those who kept their cool saw their investments completely recover and then some.

 

The point of all this is that the stock market has wild swings, and I have argued that the swings have gotten wilder in recent years.  At any given moment things may look crazy, but time has a way of evening this stuff out.  After two weeks it looked awful for the stock market.  We had a 99^th percentile train wreck on our hands.  Two short weeks after that, things went from 99^th percentile bad to 92^nd percentile bad.  That’s a pretty big difference, a big improvement.

So as we wrap up January, no point sugar coating it, the month sucked for investors.  But also let’s not press the panic button either; months like this happen pretty frequently.  I hope that helps you sleep better at night.