Was that big market drop really so big? Why context is key.
Context is key to analyzing and understanding the economy and markets and making informed decisions that lead to successful investment outcomes. Nowhere is context more important than near-term stock market moves, particularly when it comes to the Dow Jones Industrial Average (the Dow).
To that point, on August 14, the Dow tumbled 800 points on concerns the US/China trade dust up was hurting the global economy. Set aside the fact that the Dow is a 30 stock, price-weighted index that doesn’t represent the broad market, 800 points is a big, scary number which the financial media was more than happy to focus on (nothing attracts viewers and readers like fear). Relative to the price of the index, the 800 point drop wasn’t all that meaningful, equal to about a 3% pullback. While a 3% move lower isn’t fun, it doesn’t get us anywhere near the worst one day return in the history of the Dow. In fact, it takes a pullback of 7% just to crack the index’s top 20 worst days. Given the high, absolute level of the Dow today (it trades just shy of 27,000), and the fact that since 1896 it has fallen by at least 2% in a single day about 1,000 times, we should be prepared for big point drops in the Dow and we should be prepared to put those point drops in context.
Putting market moves in context is key because it should help us better manage how we respond to market volatility. That should help us better maintain a long-term view and that should help us remain invested. Consider if you invested $10,000 in the S&P 500 Index 20 years ago, your initial investment would be worth about $33,000 today. However, miss just the best 40 days for the market over those 20 years and your initial investment would be worth about $4,000 today. Wealth can’t be created if capital isn’t invested and remains invested.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.
Tagged: Tim Holland, market perspectives, weekly wire, S&P 500, US equities, US/China trade