Two weeks into 2016 and already down 8%–OUCH

Dear Stocky,

Is anyone else besides me getting nervous about what’s happening in the stock market lately?  I always thought that the stock market did well in an election year but they’ve been going down.  I guess today things are a bit better.  But what do you think is going on?

I need to read some of your calming words again……

Mimi Ocelot

 

 

Here is an email that I got last Thursday.  The ironic thing is the market was up Thursday, but then crashed again on Friday, down about 2.5%.  So it’s understandable that Mimi Ocelot is nervous.

 

Also, for the sake of disclosure, Mimi is my mother-in-law, Foxy Lady’s mom.  Having known her for nearly 10 years, I can say she is definitely a nervous soul, but with the craziness going on in the market it’s understandable that even the heartiest of souls could be getting nervous.  Here is my take on the latest market gyrations.

 

“Just the facts” –Joe Friday, Dragnet

 

First, let’s look at the facts.  The thing about the stock market during election years is a bit of an old wives’ tale.  If you look back to 1950 (when the S&P 500 started), the returns during presidential election years averages about 7%, and the returns during other years averages about 9%.  So election years are a little worse, but they are both pretty good.  So this is another instance where people try to predict the market and they find they’re right about half the time and wrong about half the time.

Now let’s try to put these first two weeks of 2016 into perspective.  Stocks are down over 8% which is a pretty crazy steep fall over two weeks, but it’s not unprecedented.  Since 1950, there have been 17 two-week periods that had falls this bad or worse.  And of those 17 instances, 11 of them saw the stocks recover to their “pre-drop” levels a year later.  So that tells you most of the time you have these steep drops but the recovery is not that far off.

The other 6 times you ask?  One instance was during the 1987 market crash, and the other five were from the 2001 internet bubble or the 2008 financial crisis.  So maybe the recovery took a little longer, but not much.  After a couple years, stocks were hitting new highs.

So if you want encouraging words, I am definitely optimistic.  We’re going through a tough time, but nothing all that different from what happens every few of years.  Actually, the things that fundamentally affect the value of the stock market—a strong economy, innovation and scientific advancement, new products—all seem positive.  So I wouldn’t be worried.  Of course, Foxy Lady and I have a much longer time horizon that Mimi Ocelot so we can ride out a longer storm.  But things will be fine.

That said, there are some interesting market dynamics going on, especially lately.  I actually have a lot to say on this so I am going to break this up into a two-parter.  So tune in on Thursday to hear what I think is driving all this craziness.