Diagnostic Tool: What Are Normal Market Movements?

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It is common for investors to be surprised by movements in their portfolios. This surprise often creates concern that something has gone wrong or suspicion that something should be done. Investors with these suspicions need a diagnostic to help determine the answer to: Are these normal market movements or should I be concerned? This article is an attempt at that.

Short term market movements are like the end of a whip being cracked up and down. And over short periods of time the market can easily and frequently move in either direction. Perhaps surprisingly for many, in investing even 10 or 15 years is still a short time period.

If you have an investment strategy that is diversified and tilted based on known factors, then chances are no matter what market movement you have recently experienced, the answer is that you should not be concerned.

However, I hope that this in-depth analysis of what is normal helps to settle your nerves and give your investment strategy more time.

Analysis Set-Up

For this analysis, I created rolling time periods of percent gain or loss using the daily values of the S&P 500 Price Index over the 69 years from January 1950 through the end of December 2018. I then calculated the mean return and standard deviation of these market movements.

I used the S&P 500 Price Index because it represents market volatility better than the total return index (which includes reinvesting dividends).

For weekly, monthly, quarterly, annual, decadal, and generational periods, I used rolling 5, 23, 62, 250, 2,500, and 7,500 trading days respectively.

Rolling time periods means that there are more time periods analyzed than there is actual time. For example, in one year of data, I analyzed 250 rolling one-year periods by simply incrementing the period by one day until each of the 250 possible starting/ending day combinations are represented. In this way, at the end of all 69 years, there were 17,060 rolling one-year time periods.

Daily Movements

On average, the stock market moves up or down about 0.65% every day. If all that movement was in one direction, the market would move 405.18% every year, but it is not all in one direction. Up and down days cancel each other except for a dozen days which make up the return of the market.

The mean return of one day is 0.03% and the standard deviation on daily market movements is 0.96%. This means that any daily movement between -0.93% to 1.00% is within one standard deviation and is exceedingly normal. Even within two standard deviations the movement is between -1.89% to 1.96%.

This means that on a $1 million portfolio, it is very normal to lose $9,300 or even $18,900 in a single day.

That being said, if you called your financial advisor every time the market was down more than -1.89% in a day you would be calling your financial advisor about 6 times a year.

Even if you limited your call to downward market movements worse than -3.43% in a single day, you would still be calling your financial advisor on average every year. In the past few years you would have been calling your advisor on August 24, 2015 (-3.94%), June 24, 2016 (-3.59%), February 05, 2018 (-4.10%), and February 08, 2018 (-3.75%).

There is no value in calling your financial advisor on the worst trading day every year. Being invested on the worst trading day of each year is not a mistake. Trying to time the markets by jumping in and out in an attempt to avoid that one trading day is a mistake.

In the time period, the worst day for the S&P 500 was October 19, 1987, known as “Black Monday“, when the S&P 500 lost -20.47% in a single day. Even at the end of such a day the annualized return for the previous year was only -4.83% and the subsequent year ended up with a positive 11.58% return.

Bad days can happen. At the end of a bad day, the future outlook of the markets is more positive. Because of this positive outlook, a large down day is one of the worst days to panic and sell. It is better to just wait.

Weekly Movements

On average the stock market moves up or down about 1.57% every week. If all that movement was in one direction the market would move 124.80% every year, but it is not all in one direction. Up and down weeks cancel each other out except for about five weeks a year which make up the return of the market.

The mean return of one week is 0.17% and the standard deviation on weekly market movements is 2.14%. This means that any weekly movement between -1.97% to 2.30% is within one standard deviation and is quite normal. Even within two standard deviations the movement is between -4.11% to 4.44%.

If you called your financial advisor every time the market was down more than -4.11% in a week you would be calling your financial advisor about 7 times a year. Even if you limited your call to downward market movements worse than -7.22% in a single week, you would still be calling your financial advisor on average every year.

In the past few years you would have been calling your advisor about the drop over the five previous trading days for the weeks ending on August 24, 2015 (-9.95%), August 25, 2015 (-10.94%), February 08, 2018 (-8.54%), and December 24, 2018 (-7.65%).

Markets move downward when there are more sellers than buyers. When there are more sellers, market makers must buy the stock, but they are allowed to move the price they are willing to pay lower. Markets stop dropping when sellers stop selling. When the last investors who are going to panic and sell have given up there are no more investors who are willing to sell at the bottom and the markets stop dropping. These lower prices can often attract savvy investors ready to put additional money into the markets. When the number of investors buying exceeds the number of investors selling that is when the markets start going up again.

On average, the market gains about 0.17% in a week. After a week with a negative return, the market gains, on average, 0.23%. If you take any action after a negative week in the markets, it should be to send your advisor the money you have been hesitant to invest.

Monthly Movements

On average the stock market moves up or down about 3.41% every month, where a month is measured as 23 consecutive trading days. If all that movement was in one direction the market would move 49.54% every year, but it is not all in one direction. Up and down months cancel each other out except for less than three months a year which make up the return of the market.

The mean return of one month is 0.77% and the standard deviation on monthly market movements is 4.43%. This means that any weekly movement between -3.66% to 5.20% is within one standard deviation and is quite normal. Even within two standard deviations the movement is between -8.09% to 9.62%.

If you called your financial advisor every time the market was down more than -8.09% in a rolling month (23 trading days) you would be calling your financial advisor about 7 times a year. Even if you limited your call to downward market movements worse than -15.57% in a single month, you would still be calling your financial advisor on average every year.

We haven’t had a rolling month like that in recent years, although we had two of them in 2011 ending on August 08, 2011 (-16.41%) and August 10, 2011 (-16.60%). Despite these single month losses, the year 2011 ended with the S&P 500 Price Index being a flat -0.00%.

The worst monthly return for the S&P 500 Price Index was -29.12%. During the best 23 consecutive trading days, the market was up 26.61%. These were the days immediately following the bottom of the financial crash in 2008. This demonstrates the importance of staying invested even after a market drop.

Even though about 61% of rolling months have a positive return, when monthly movements are defined as calendar months instead of consecutive trading days, the market has never had a calendar year with twelve consecutive positive calendar months until 2017. In 2017, the market also experienced historically low volatility.

Quarterly Movements

On average the stock market moves up or down about 5.77% every quarter where a quarter is defined as the previous 62 trading days. If all that movement was in one direction the market would move 25.16% every year, but it is not all in one direction. Up and down quarters cancel each other out except for one and a half quarters each year which make up the return of the market.

The mean return of one quarter is 2.09% and the standard deviation on quarterly market movements is 7.20%. This means that any quarterly movement between -5.11% to 9.29% is within one standard deviation and is quite normal. Even within two standard deviations the movement is between -12.30% to 16.49%.

If you called your financial advisor every time the market was down more than -12.30% in a rolling quarter you would be calling your financial advisor about 8 times a year. Even if you limited your call to downward market movements worse than -25.78% in a single three month period, you would have called your financial advisor 44 times during the financial crash in 2008.

The worst rolling quarter for the S&P 500 was during this time, down -40.60% over the previous 62 trading days ending on November 20, 2008. The best rolling quarter in the markets ended on November 9, 1982 up 39.64%. During two out of every three quarters, the market has a positive return.

Yearly Movements

On average, the stock market moves up or down about 14.85% every year, where a year is defined by the previous 250 trading days. If all that movement was in one direction, the market would move up 299.31% every decade, but it is not all in one direction. Up and down years cancel each other out except for less than six years each decade which make up the return of the market. Another way of saying this is that only 73.5% of the years will have positive returns. This is normal and does not represent a failure of an otherwise brilliant investment plan.

The mean return of one year is 8.81% and the standard deviation on yearly market movements is 15.78%. This means that any annual movement between -6.97% to 24.59% is within one standard deviation and is quite normal. Even within two standard deviations the movement is between -22.76% to 40.38%.

If you called your financial advisor every time the market movement was down more than -10% over the past rolling year you would be on the phone an average 31 times a year, although many of your calls will likely be clumped into a single month.

Even if you limited your call to downward market movements worse than -39.80% in a single year, you would still have called your financial advisor 69 times over the past 69 years, but 62 of the rolling one year drops were during the 2008-2009 market crash. The worst rolling year ended on March 09, 2009 with the S&P 500 Price Index down -48.77%. The other 7 rollings years were in the Autumn of 1974 at the end of the Golden Bear Market of 1973.

The best rolling year ended on March 5, 2010 with the market up 68.31%. This was, of course, exactly a year after worst rolling year on record and again shows the importance of staying invested.

Decadal Movements (10 Years)

On average, the stock market averages moving up 111.60% every decade, where a decade is defined as the previous 2,500 trading days. But even ten years is not long enough to ensure a positive return within one standard deviation. On average 8.24% of rolling ten year returns are negative. They call ten years with zero or negative returns a “lost decade” in the stock market. While unfortunate, being invested during a lost decade is not a mistake. Such decades are simply a normal part of market volatility.

We have had lost decades ending in 1974, 1975, 1977, 1978, 1979, 1982, 2008, 2009, 2010, and 2011. And the worst rolling decade for the S&P 500 was a cumulative loss of -47.99% ending on March 9, 2008.

Such decades obviously can happen. And at the end of such a decade, what do you want your advisor to do? You don’t want your advisor to panic and sell everything. You want them to remain calm and rebalance your portfolio, selling some bonds and buying more stocks. The 2,500 trading days since the bottom of the market on March 9, 2009 experienced a return of 305.71% and averaging 15.03% per year as defined by 250 trading day.

The best rolling decade ended on September 1, 2000 with the markets up 414.71%.

Generational Movements (30 Years)

On average, the stock market moves up 799.07% every thirty years, where 30 years is defined as the previous 7,500 trading days. There is no 30-year period where the market had a negative return.

The worst 30-year return ended on October 25, 1985, up 305.80%. Even on March 9, 2009 at the bottom of the Financial Crisis the 30-year return was still a positive 586.69%.

While the standard deviation of 30-year returns is 335.67%, the risk of poor returns is minimal. The mean return of thirty years is 799.07%. This means that 30-year returns around one standard deviation is between 463.40% and 1134.75%.

For this reason, who wouldn’t want to have invested as much as possible over any 30-years time period no matter which 30-years you would have experienced?

The best 30-year return ended on March 24, 2000, up 1,967.49%

Summary

Market volatility is a normal part of investing. The gyrations may make you dizzy if you watch them too closely. They are the risk part of “risk and return.” We recommend that you don’t watch short term market movements. In this way, you won’t allow normal volatility to ruin an otherwise brilliant investment strategy.

The danger of market movements is that you may have to make withdrawals while the market is down and take a larger percent of your portfolio than if the markets had not gone down. For this reason, we suggest that you have some of your portfolio invested in bonds in order to support short term withdrawal needs.

We suggest investing the money that you might spend over the next five to seven years in stable bond investments. Banking five to seven years of spending in bonds should help you sleep at night during market downturns. With seven years of spending banked in bonds, your stock portfolio can gyrate all it wants for seven years.

Over a seven year time period, 89.35% of the time the markets have a positive return. This leaves only 10.65% of rolling seven year periods with a negative return. We think that represents a good chance of not losing money.

The average seven year return is 66.95% appreciation with a standard deviation of 57.22%. One standard deviation of returns, therefore, range from 9.73% to 124.17%. And we think that represents a good chance of growing your assets.

Anyone can measure how far the markets have fallen from their all-time high. However, if you try to measure how far the markets have risen from their all-time low, it is impossible. The percent gain from the all-time low is nearly infinite. The markets have been appreciating for the past 200 years. Sure, they have had some major corrections, Bear Markets, and even a crash or two, but the return is still nearly infinite.

I’ve heard many investors say, “Well, the markets can’t just go up forever, can they?” To which, I would reply, “They have so far, haven’t they?”

Photo by Annie Spratt on Unsplash

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)