Drop (in the bucket)

Markets will fluctuate, as Pierpont Morgan caustically observed. And “fluctuate” means down as well as up. Perhaps I, too, am being caustically obvious, but I’ve long believed that a broad perspective on markets can often bring more clarity than myopic obsession.

It was in 2011 that the S&P 500 Index last fell more than 10%, apparently beyond the memory of many investors who believed these corrections were relegated to ancient history, like buggy whips and handlebar moustaches. Last month the S&P dropped more than 6%, and between 21 May and 25 August of this year, declined 12.4%, ending the 3rd-longest spell (since 1928) without such a decline.

The graphic below (courtesy Ned Davis Research) plots the S&P 500 Index since 1928 (on semi-log scale) with the number of days between 5%, 10% and 20% declines. I’ll offer two observations: first, large corrections do seem to be occurring with a little less frequency than in the past, and secondly, the Index has risen from less than 5 in 1932 to around 2,000 today, declining frequently along the way. For long-term investors, the drop from 2,130 to 1,867 (May-August) is a drop in the bucket. It’s the move from 5 to 2,000 that really counts.

• 11 Nov, 2014

  How The Mighty Fall

  Between March 2000 and October 2002, the NASDAQ Index fell 75%, from over 5,000 to under 1,300. Of course, valuations ...

• 8 May, 2024

  Beach Reading

  I'm happy to go to the beach year-round, but it's now really becoming beach weather, so I have five new book suggestions ...

• 21 Dec, 2016

  Shock, Part 4 (Divided We Are)

  We began this series with a review of the likely economic policies and their implications of the new Trump ...