This Market Pullback Isn't Necessarily Unusual

Posted by Bigtrends on January 22, 2016 9:02 AM

What's Going On? - This Happens All The Time

What’s taking people’s breath away about this year’s stock market sell-off is probably some combination of three things: A) we’re unaccustomed to it, we’ve been spoiled for years, and B) it’s global in nature (and some would say global in origin), and C) the speed of the selling is incredible, by any historical standard – it feels like a whoosh straight down.

But as disorienting as this all feels, the truth is that double-digit drawdowns from prior highs in the S&P 500 (SPX) (SPY) are not an anomaly – they are the norm, statistically speaking. In fact, this happens during 2 out of every 3 years.

by Michael Batnick :

“What the hell’s going on out here?” Vince Lombardi

The S&P 500 began the first ten days of the year with an 8% loss, it’s worst opening performance ever. While there are 475 different 10-day periods worse than the 2016 open, the 8% decline was still pretty bad, faring worse than 98% of all ten-day returns.

So here we are, not even through January, and already we’ve experienced a 11.3% drawdown in the S&P 500. Should this give us reason for concern? Time will tell, but for now, we can say that these sort of intra-year drawdowns are par for the course.

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Here are a few takeaways:

  • The average intra-year decline is 16.4%. This current decline might feels worse due to the speed at which it’s happening, and because it’s occurring right out of the gate.
  • Double digit declines are to be expected, 64% of all years experienced them.
  • It’s not unusual for those double digit declines to be of little importance. 57% of the years with 10% drawdowns finished positive.
  • Stated differently, 36% of all years saw a double digit decline and still finished positive.
  • Drawdowns of 20% or more have happened 23 times, or 26% of all years. On five of those 23 occasions, stocks still ended up positive on the year.

Staying invested when the stocks are seemingly dropping every day is extremely difficult, which is why the long-term rewards can be so bountiful. Compounding your wealth at 5% after inflation for twenty years- a very reasonable goal- results in a 165% gain. In order to be the beneficiary of these returns, you have to accept some painful, but temporary declines along the way, which for most people is incredibly difficult to do. However, the difficulty of staying invested pales in comparison to the difficulty of consistently getting out and back in at the right time.

Courtesy of philstockworld.comthereformedbroker.com

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