The S&P 500 is down almost 8%. It’s the worst start to a new year EVER. Is this a sign of things to come? Is the stock market doomed in 2016? Exactly how rare is a downwards move of such epic magnitude?
The market has recovered from every downturn it’s ever experienced. That’s a pretty good track record. The most surprising thing about this downturn is how much publicity it is getting. Every year since 2000 had a drawdown of at least 7% at some point except for 2013. In 2013, the big worry was that it had been too long since the last correction. For real.
Here’s some data from Morningstar on the S&P 500 as of 1/18/2016:
We’ve only had 4 down years since 2000, but 16 years (counting this year) with a drawdown of 7% or more. There were 9 years with a double-digit drawdown and two more years where the drawdown was almost 10%. If you’re invested for any significant period of time, you’re going to see the market go down. For the last 16 years or so the average drawdown has been over 16%. A drop of 8% is normal and a further downward movement would not be unusual or signal something ominous.
The hardest part about riding out market turbulence is thinking that we could have seen it coming. We don’t know how long the downturn will last or how deep it will go (no one does), but we do know that sticking with a prudent financial plan wins over the long-term versus timing the market.