Relax, 1,000 Points Ain't What It Used To Be (For the Dow Jones Index)

Servo Wealth ^ | 02/06/2018 | Eric D. Nelson, CFA

[SeekAndFind]

"Dow Industrials plunge more than 1,100, the biggest one-day point drop ever..." was a headline after the market closed today.  Why lead with the point decline and not the percentage decline? A 4% drop isn't nearly as alarming, and you might be less inclined to click on the headline.

On a day in October of 1987, the Dow dropped 23% -- about 6x as much as today's decline.  Almost a quarter of stock market value was temporarily wiped out in about eight hours.  That was a loss of 508 points.  If we had only experienced the percent loss at that time which we saw today, the Dow would have only gone down about 80 points. But the Dow was only 1,700 in the late 1980s, a far cry from the 27,000 level we reached earlier this year (and remember, the Dow price doesn't include any dividends earned by stocks, which if counted and reinvested would inflate this number considerably).  A 1,000 point drop would be catastrophic when the Dow was 1,700, today it's just a blip.  Said differently, 1,000 points ain't what it used to be.

How much of a blip? The chart above shows the annual returns on the S&P 500 every year since 1980.  But the red number at the bottom of each year lists its maximum, intra-year decline.  We forget how volatile stocks are in the short run because the long-term trend and returns are so impressive.  Despite the fact that the S&P 500 was positive in 28 of 37 years between 1980 and 2016, it experienced a drawdown from its peak every single year.  On average, the intra-year decline on the S&P 500 was -14.2%, ranging from just -3% to -49% in 2008.  One way to interpret this data is that you should expect to lose at least 15% of your stock portfolio at some point throughout the year, every year.  Any year where the maximum peak-to-trough decline is less than -14%, like last year, is a less volatile year and shouldn't be expected.

Of course, I can't discuss short-term losses without also pointing out the long-term returns you would have earned on the S&P 500 over the 1980-2016 period.  The "gain" you received for putting up with the unpredictable short-term "pain."  The average return on stocks over this period was +11.5% annually.  $1 in the S&P 500 was worth $56.80 by year-end 2015.  But what if you decided to avoid these inevitable short-term declines and invest in risk-free Treasury Bills?  You would have only earned +4.4% a year and your $1 would have barely reached $5.  Looked at through this lens, temporary stock market declines or significant one-day drops are not something the long-term, growth-oriented investor should worry about or try to avoid.  The very presence of the short-term volatility is one of the reasons long-term stock returns are so high!  Without the short-term losses, returns would be much lower and unlikely to allow you to achieve your long-term goals.  You might not like the stock market volatility, but you cannot be successful without it!

Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

[bigbob]

In other words, 1000 / 25000 is different than 1000 / 10000

[equaviator]

The market wants to grow. If only my golf ball wanted to go in the hole (sigh).

[SeekAndFind]

Yes, but try explaining that to the average high school grad today.... :)

[Red Badger]

The MSM was breathlessly hyping this crapola yesterday evening news, like it was TEOTWAWKI.................

[Red Badger]

Yes, but try explaining that to the average PHD grad today.... :)

[nobamanomore]

Yes, and anyone that couldn’t see this coming needs to study some more. The markets were pumped to protect O for 8 years. Earnings weak market.

[vpintheak]

Can’t have it both ways folks.

[Sacajaweau]

Taking some money....IN THE NEW TAX YEAR.....and will buy it back in a bit....

Looks like a whole lot of folks are doing the same thing

[Sequoyah101]

Try explaining to many financial reporters the difference between gain, % gain and Rate of Return. Most seem to use just about any metric interchangeably and at random and reference it as any of the three. RoR and NPV are all that really matter to me.

The ones that call % gain return and let the reader assume it is annual RoR when it is probably total return or average rate of return and don’t bat an eye are the ones that piss me off. You’ve got to dig very far down in the prospectus to find out what they are really saying. The SEC let them get away with this apparent range of reporting metrics and intentional obfuscation.

Once that is sorted out then try to explain to a high screwl graduate ratio and proportion. Around here the pinnacle in life for the average successful person is when they played high screwl football or were a pom pom girl. The rest work for them.

[Red Badger]

Journalists don’t care a whit about any of the real market indicators as long as they can use the numbers to make Trump look bad, knowing that the average American doesn’t know the difference between a RoR and a corn cob..................

[Red Badger]

This is really the long awaited and expected ‘correction’ in the market that has been talked about endlessly for over a year or more. And it’s only 5%, when 10% would be more appropriate.......................

[I want the USA back]

Exactly my thoughts upon hearing the news reader say obvious lies. If the airhead had said “the biggest percentage” drop,” I would have had no objection.

Are they stupid, or just biased? Both.

[fireman15]

“A stock market correction is when the market falls 10 percent from its 52-week high. Wise investors welcome it. A pullback allows the market to consolidate before going toward higher highs. Each of the bull markets in the last 40 years has had a correction. It’s a natural part of the market cycle. Corrections can occur in any asset class.”

https://www.thebalance.com/stock-market-correction-3305863

The breathless reporting on this expected event is amusing.

[11th_VA]

The MSM was breathlessly hyping this crapola yesterday evening news, like it was TEOTWAWKI.................

It's hilarious, just saw breaking, 'STOCK MARKET - WOSRE MONTHLY LOSSES IN 8 YEARS !!!'

This was all totally predictable. Tax reform means US is now 'Open for Business'; Emerging markets sold off; since Tech has the most to gain, NASDAQ has been least affected by the sell-off; it's just everyone 'rebalancing' in light of Tax reform ...

[Red Badger]

The breathless reporting on this expected event is amusing.

The expected reporting on this amusing event is breathtaking................

[fireman15]

Anything to try and make President Trump look bad.

[trebb]

Yep - no reason to panic unless it actually tanks and I don’t think it’s going to happen. One of those “good news that’s gonna get better” type deals where this was a opportune time to sell and start looking for buy opportunities as the global markets “adjust” to the tax cuts......all the bonuses/plans to expand and move to the US of A and other good things were not mistakes....

[Sequoyah101]

If it goes the way some of us think of will I’m actually happy it has happened.

The question from a lot of FA client types amounts to meh and why? Makes no sense.

One very sage and objective fellow actually uttered something about market interference. Never thought I’d ever hear him go there.

Time will tell.

[Dilbert San Diego]

Many “financial reporters” are not really financial market experts.

Of course there are distinctions when talking of rate of return, percentage gains, etc. But such details seem over the heads of the people they have on these financial reports nowadays.