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| Pathways Advisory Group, Inc. Evon Mendrin, CFP® |
Well, that escalated quickly.
If you’ve been anywhere near the news this week, you’ve
likely been made aware of the most recent “End of the World As We Know It.” Stocks had a rough day at the office, and globally we saw quite the decline. How bad was it? Well, if you do a quick Google search of “stocks”
and “bloodbath”, you can find more articles than you’d like explaining how the
sky is falling, such as:
- “Traders are betting that the global market bloodbath…”
- “Wall Street Bloodbath Paints Tech and Media Stocks Red”
- “Australian stock market plummets after bloodbath on Wall Street…”
- And of course, to help you get through the chaos – “5 Ultra-Safe Stocks to Survive the Wall Street Bloodbath”
To add to it, the financial news is sure to inform us that
the Dow Jones Industrial Average faced the third-worst points decline in history,
having dropped about 832 points. It’s enough to convince you the end is here and there’s
no going back. But what does that really mean? Are we really seeing such a
historically devastating event?
When looked at through the proper historical perspective, we
see that the day’s drop in the Dow Jones was hardly a devastating event. It’s
easy to view dramatic events through a microscope, looking only through a narrow lens. But what if we change lenses,
zooming out with for a wider perspective?
Let’s go one lens wider. 832 points may be the third-highest
point
drop, but as a percentage, it was only roughly 3.1%. That’s hardly historically devastating. For perspective, the 20th largest historical percentage drop in the Dow Jones was 7.07% (7/20/1933).
The largest ever? 23.52% (12/12/1914). A 3% dip is a drop (no pun intended) in
the bucket compared to that.
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| Data from us.spindices.com (10/11/2018) |
Interestingly, that huge drop was only 16.8 points. Using a points drop isn’t a helpful
reference when the value of the Dow Jones is so much higher than the past. In
1980, the Dow as a whole was only worth around 850 points! The index is currently valued at around 25,000. As Dustin
wrote about before, “the Dow just ain’t what it used to be.” Long-term, despite
the headlines, the stock market continues its march.
What about the performance of stocks for the year? Through
this lens, the Dow Jones Industrial Average is actually positive for this year
– just over 3%year-to-date. So is the S&P 500, a popular measure of large-cap
US stocks, gaining just over 4%.
US stocks as a whole are positive for the year, as the Russell 3000 index is up about 3%. Sure takes the sting out of one day’s
news.
With the widest lens of historical perspective, we also see
a decline like this is actually typical. Par for the course. Over the last 38 years, the
S&P 500 has had positive returns in 29 years (76%). However, we see an average
decline within each year of 13.8%. If we go back to 1946, we see similar results. That kind of drop, historically, is typical
within any given year, and doesn’t tell us much about how the year will end.
It’s amazing what perspective can do when faced with one
day’s dramatic event. Taking a step back gives us the opportunity to evaluate
what’s really going on and not overreact. Where do stocks go from here?
Impossible to say. Trying to predict where the stock market goes in the
short-term is a fool’s errand. Should we rush to action? Despite the “chaos” you see,
nope. Try to tune out the noise, keep a long-term perspective, and continue with the long-term investment
plan you’ve had all along.
Note: All returns data are as of writing, 10/11/2018. The data may have changed as of the
time you read this
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