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January Market Turbulence: A Historical Perspective

Through Thursday, the S&P 500 Index was down about 8.6 percent during the month so far. To put this in perspective, the worst January in S&P 500 history was 2009. In January 2009, the market fell 8.6 percent. We’re on pace for a January stock market loss as bad as we’ve ever seen. What lessons can we glean from historical data?

First, let’s look at the worst January returns in history. Below is a chart that compares this January to the worst 20 Januarys on record (all returns are price-only returns on the S&P 500, meaning that they don’t include any dividends).

Jan 1 sub

Now let’s look at what the returns were for the full calendar year after these 20 bad starts, inclusive of these rough starts. The average calendar year return for these 20 years was -2.2 percent and the median was -4.1 percent. There are many examples where a rough January continued through the calendar year, but there are several examples where a poor January turned around during the rest of the year.

It’s difficult to divine a precise trend from these data. Some of the bad years, like 2008 and 1957, were in the midst of recession. There are others, like 1940 and 1941, which took place amid larger global issues (World War II). Still others, like 1977, were the result of currency devaluation and oil shocks during a secular bear market. On the positive side, three of the best calendar-year returns among these 20 have come in recent history (2009, 2010, and 2014) during a secular bull market.

Finally, let’s take a look at calendar year returns during these years exclusive of the rough January. In other words, what happened from February through December in these years? As it turns out, the average return for the rest of the year during these 20 bad starts was 3.2 percent, with a median of 2.4 percent. The average annual return across 88 years of data is 7.4 percent. This suggests that the market might turn around for the rest of the year, but historically the return after a bad January has been less than average.

Is this January a sign of things to come, or a correction in the midst of a broader bull market? We cannot know that answer until it plays out. These kinds of market pullbacks are precisely the reason we tell people not to try and time the market, and to invest in a prudent portfolio that includes bonds, even when it looks like the returns might be small. Most people — financial advisers and investors alike — “missed” this correction. A diversified portfolio has not suffered the same setbacks as the stock market, and should not cause as much pain for investors.

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One Comment Post a comment
  1. Gilbert W. Chapman #

    Great post, Luke . . . One of these days people may wake up and realize that what the noted economist Ludwig Lachmann stated in one of his books was true.

    Hayek once said that Lachmann should have been awarded the Nobel . . . Need I say more?


    January 22, 2016

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