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The first two weeks of January returns for the S&P 500 index were the worst in history. That statement is true. The index returned -7.93 percent for the period from Jan. 4-15, which was its worst ever start to the year. How many times have you read or heard some variation of this in a headline?
Pundits are misleading you
The pundits were out in force conveying the significance of this bad start to the rest of us. This comment from Daniel Deming, managing director at KKM Financial, was typical: "I guess it makes a little more difficult hole (at the) start of the year for the market to dig itself out of."
The import of this hand-wringing was clear. Hunker down for a bad year for the markets. Consider "fleeing to safety."
January returns are not predictive
The reality is that returns in January have little predictive power. An analysis of January returns, comparing them to returns for the subsequent February through December from 1926 through 2015, demonstrates this point. A negative January was followed by positive returns in the following 11 months 59 percent of the time. The average return was a positive seven percent.
What about years when January returns were really bad? In the five years when January had the worst returns, the average return for the ensuing year was 13.8 percent.
Significant declines in the S&P 500 are not predictive
What about the fact that the S&P 500 was down by more than 10 percent from its high on Nov. 3, 2015, through Jan. 15, 2016? Isn't that the beginning of a downward trend?
Since 1926, there have been 152 times when the S&P 500 declined by 10 percent. The annualized compound return for the next year was 11.95 percent. For the next five years, it was 10.07 percent.
There have been 39 times when the S&P 500 declined by 20 percent. The annualized compound return for the next year was 10.43 percent, and over the next five years it was 9.63 percent.
Market volatility is not "abnormal"
The drop in the S&P 500 has been combined with what many commentators have dramatically (and incorrectly) hyped as "a volatile year for financial markets."
The message is clear. January was a terrible start to the year. The markets are abnormally volatile. It's time to bail.
Don't believe it.
From 2010 through 2015, the return of S&P 500 index was 12.98 percent, with an annualized standard deviation (a measure of volatility) of 13.09. In the previous eight decades (starting in 1930), returns varied widely, but volatility was higher in six of those decades.
Your plan of action
How should investors use this information?
- Ignore most of the financial media. It appeals to fear, anxiety and greed.
- Stick to a disciplined financial plan.
- Pay no attention to short-term market returns.
- Focus on your asset allocation, global diversification and low costs.
Dan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and his latest, The Smartest Sales Book You'll Ever Read.
The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.