Get rational before reacting rashly
It was a painful week for anybody who owned stocks. Instead of a Happy New Year, we were treated to the worst beginning ever, with the S&P 500 dropping 6.2%. Jan. 4 to 8 also marked the market’s largest weekly plunge in almost four and a half years.
The Wall Street Journal was kind enough to show that, historically, five days don’t equal a year. Three of the four most recent "first five days" annual returns showed little correlation with the Stock Traders’ Almanac’s well-known January Barometer, which states “As the first five trading days go, so goes the year.”
Fear was certainly in the air last week as visions of 2008 are still fresh in traders’ memories. Headlines like the one below make people hesitant to commit new money and itchy to sell into weakness.
Should the “worst week since 2011” make you want to unload stocks at much lower prices than just days earlier? Did it provide a wonderful chance to load up on bargains? Only time will tell.
We can certainly go to the tape to see what followed the scary sell-off, which troughed on Aug. 9th that year.
In retrospect, that moment proved to be a great entry point for those with the guts to buy when the mood was bleakest. By Dec. 31, 2012, the S&P 500 ETF (SPY, Financial) had climbed 29.1% plus dividends from its Aug. 9, 2011 intraday low of $110.27.
The SPY gained 67.5%, sans dividends, by the end of 2014. At the end of 2015, it was up 86.4% from that horrible summer day in 2011, even before adding in the effect of 14 quarterly payouts.
The damage so far has been much more extensive than what you’d guess from seeing the numbers on the DJIA and the S&P 500. By mid-week (Jan. 6) the average S&P 500 stock was off by almost 25%. By closing time on Friday, Jan. 8, discounts were way larger.
Small and mid-cap shares are significantly cheaper on average than they sat after the Aug. 24, 2015 flash crash when futures trading sent the DJIA down by over 1,000 points before the 9:30 AM opening bell.
Marked-down shares could theoretically become even better bargains, but history suggests purchasing now will work out better than selling in despair. There were 14 separate 5% or greater pull-backs since the March 9, 2009 start of the post-recession bull market.
Thirteen out of 14 of those, including the already mentioned August 2011 meltdown were preludes to new all-time highs for the S&P 500.
I’d be willing to bet we’ll see a new record again. The only question is in the timing.
Ebullient times coincide with periods when huge percentages of stocks trade for above their 50-day moving averages (May 21 and Nov. 3, 2015). Shock and panic revealed themselves when only tiny fractions of all shares carried that designation (Aug. 24 and Sept. 28, 2015).
Last week’s close took the standard deviation of this function to near a multi-year record reading. The odds of a reversion to the mean far outweigh a continuation to an even further outlying number.
Fight the urge to sell. Consider picking up some bargains. It is okay to feel the same as everybody else. It is not okay to act like them.
Disclosure: I was a buyer of stocks in the week ending Jan. 8.
