Putting Monday’s Drop in Perspective
Monday was the worst day that the Dow Jones Industrial Average has ever had, at least in terms of points. That sounds scary, and it certainly wasn’t fun, but just like most big events, we need to see it in context.
Just How Bad Was Monday, Really?
Let’s convert the 1,100 point drop into percentage terms. 1,100 points certainly sounds like a lot – and it is – but it’s not really the full story. Even though the media loves talking about everything in terms of points, they really aren’t all that useful in terms of understanding what’s going on, especially in a historical context. A point today, when the Dow is at a little more than 24,000, is a very different thing than a point back in late 2008 when the Dow was around 7,550. To make everything comparable, we need to be looking at the returns, or how much the index moved in percentage terms.
As an example, the second largest daily point loss that the Dow ever had was on September 29th, when it dropped by about 778 points. Monday’s drop was a little bit more than 1.5 times that size in points, but because the Dow was a lot lower back then, in percentage terms, the 2008 move was 1.5 times bigger than Monday’s loss. And September 29th, 2008 was only the 20th worst daily percentage loss in the Dow’s history.
This Monday’s drop was also more than twice as big in terms of points as Black Monday in 1987, when the market went down 508 points (and lost 23% of it’s value), and yesterday was about 30 times bigger than the original Black Monday in 1929. The Dow only dropped 38 points during the worst single day of the Great Crash, though it did lose almost 13% of it’s value, along with dropping almost 12% the day before, and it would subsequently lose another 10% eight days later on November 6th.
So how much did the Dow move on Monday? It was down 4.6%. Now, don’t get me wrong, this is a big loss, but it’s not the historic plunge that the media is talking about, and it’s not something that we could never have imagined. In fact, if we look at the daily returns (in percentage terms) since February 1985, we should expect a day like this once every 333 trading days – or about once every 20 months. We know that days like this are in the cards. This is just part of investing in the stock market. Though admittedly, it’s been a little while since we had a day this bad. The last two times we had days this bad were on August 8th and 10th, 2011, when the Dow was down 5.5% and 4.6%, respectively.
So, What Caused The Drop?
Well, there’s going to be a lot of people saying a lot of different things “caused” Monday’s drop, but the truth of the matter is that there is no single answer. There was no single event that we can point to and say that this caused the market to drop. That’s ok.
We prefer to have reasons. We like to be able to explain what happened in terms of specific causes and effects, but realistically that’s not always possible. We tend to anthropomorphize the financial markets, and say that they do things for specific reasons, but that’s not really true. They move based on the collective actions of all of the market participants out there, and for whatever reason, the average market participant decided that the US stock market was worth about 4% less on Monday than it was on Friday. Anything more than that would be pure speculation and it wouldn’t even be useful speculation.
One other point that has been coming up with regards to Monday’s loss. This is not a repudiation of Trump’s management of the economy, or the “Trump Rally” that we’ve seen for the past year or so – or rather, it’s exactly as much a repudiation as the recent market gains have been a commendation of his handling of the economy. If you think that the President caused the market to go up, then it follows that he was at least part of the reason that the market dropped. If you think that he had nothing to do with the market’s rise, then he probably didn’t have anything to do with the market’s fall.
How Big of a Setback Was Monday?
As I mentioned earlier, the markets have been really kind to us lately (and there I go anthropomorphizing the market myself). They’ve been pretty kind to us for the past decade or so in fact. It’s easy (and appealing) to forget that the markets operate based on risk. We wouldn’t be able to get the great returns that we’ve had recently if the markets didn’t go down every once in a while.
And in context, even this drop wasn’t all that bad. After the market’s close on Monday (and the not so great previous week), we’ve only given up our gains since December 8th. In other words, even after this historic plunge we’ve only given up about eight weeks of gains.
The markets move around. And they can move pretty quickly – both up and down. We know this, and we have to accept it if we want to harvest the long term returns from the stock market. In fact, we get those returns specifically for taking on the risk of investing in the stock market and dealing with days like Monday.
What we’re seeing is short term noise. There was certainly a lot of noise packed into Monday’s trading session, but it’s still just noise. We need to be focused on the long sweep of market returns. The markets have been very good to long term investors. To harvest the long term returns that will help you reach the retirement that you want you need to be able to shrug off a bad day (which we should, statistically, expect more than once every other year).
Investing isn’t something that happens over the course of days or weeks, or even a couple of years. Investing happens over decades. It’s all too easy to forget that with the wall of sound that the financial media is continuously sending our way. While it would be nice to say that you should just ignore the media, for most of us that’s a pretty tall order. Instead, focus on building a portfolio that will help you stay disciplined over the long term.
The key to that is determining your risk tolerance. How risky can your portfolio be before you start losing sleep about a day like Monday? If you’re anxious about your portfolio, it may be time to take another (or potentially first) look at your risk tolerance. Your risk tolerance moves through time, so it’s important to periodically review where you stand.
If you think your risk tolerance (or portfolio) could use a checkup, schedule a time with one of our sister firm’s (McLean Asset Management) financial advisors to make sure you’re heading towards the retirement that you deserve.