Review: Opinion: Today’s big drop in the Nasdaq 100 will happen repeatedly in 2018
As my readers know, I’m skeptical of all market predictions since none of us are psychic, but for once, I actually agree with an article making a big prediction about what the markets will do in the short-term future…But – and you knew there was a but there – while I agree with the result, it’s for the exact opposite reason the author thinks.
This week, on Wednesday, we saw a reasonably large drop in the Nasdaq 100 Index, which tracks the largest 100 non-financial companies on the Nasdaq. Over the course of the day, it dropped a little more than 101 points, or almost 1.6%. In fact, at it’s low point on Wednesday, it was down a whopping 2.25%. The author of this article has all sorts of reasons involving sector rotation and valuations, and all sorts of other stuff.
A simpler way to look at this though, is to simply ask how often the markets have seen a drop like this in the past. I pulled the daily values of the Nasdaq 100 Index from the beginning of October 1985 until Wednesday’s drop (11/29/17), and it turns out what we saw Wednesday is far from unusual.
If we are just looking at things in terms of points, Wednesday’s drop of 101 points was moderately unusual. In 32 years, there were only 81 days where the market dropped more than this past Wednesday, but this drop still represented 1% of all trading days. 1 out of every 100 days, or about twice a year, we should expect the market to drop by this much. However, this is the wrong way to look at it. At the beginning of October 1985, the total value of the Nasdaq 100 was only 111. Over time, since the markets tend to go up, the value of the index will go up as well. This means that we should be looking at things in terms of percentages, not points.
And here, we can see just how common a drop like Wednesday’s actually is. The Nasdaq 100 was down 1.58%. The index was down more than this on 835 days, or 10.3% of the time. So, we should expect to see a day like this a little bit more than every two weeks. To me, that seems like something that will happen repeatedly in 2018.
But what if we take a look at the low point of the day, when the index was down 2.25%? That’s still pretty common. There were 461 days, or about 5.7% of trading days, where the index was down more than 2.25%. Now we’re up to a little bit more than one day every four weeks. Nothing about Wednesday was out of the ordinary, so ultimately, we don’t need to come up with convoluted and tortured explanations for why the market is forsaking us every time there’s a drop. This is just what the market does.
If you’re going to invest in the stock market, you need to be able to deal with days like this, and worse. They are going to happen. The stock market can be a great tool to help you reach your retirement goals, but you need to know how to use it. To find out more, read the 12 Principles of Intelligent Investors.