Wednesday, September 21, 2011

Are Market Declines Normal?

There has been a lot of media attention about the decline in the stock market since July. Earlier this year, the S&P 500 peaked at 1363.61 on April 29. The low this year (so far) was on August 8 when the S&P 500 hit 1119.46 resulting in an intra-year decline of 17.9%. Many say this is reminiscent of 2008. Perhaps, it’s really just reminiscent of any other year. Nobody knows for sure.

The average intra-year decline (1980-2010) for the S&P 500 (excluding dividends) is 14.3%. In 1980, for example, the intra-year decline was 17%, but for the year the Index was up 26%. (We are not predicting that the market will be up for the year, just pointing out that intra-year declines are surprisingly common, even in good years.)

Click picture to enlarge.

Equity markets are volatile. The pain of a 10% drop is deeper than the joy of a 10% rise. We must maintain a long-term outlook. For more perspective see last week's blog about Market Behavior. If all else fails, a little humor may help:

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