Thursday, October 3, 2019

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Selloffs happen every year

We’re two days into October and stocks are down sharply. The S&P 500 (^GSPC) is down 2.99% over this period, the index’s worst two-day start to an October since 2008.

Bespoke Investment Group notes that the only other times we’ve seen the benchmark index drop more than 2% to start the fourth quarter were in 1934, 1935, 2008, and 2009. Certainly not reassuring for students of stock market history, who will recall some of history’s worst crashes (see October 1929, October 1987 and October 2008).

Scary stuff.

But this is also some pretty narrow quantitative history. Obviously every year, like this year, is different. And it’s sort of random to think about one calendar month’s worth of historical performance and believe we’re fated to seeing history repeat regularly.

One chart I like to highlight occasionally is this one from JP Morgan Asset Management. It broadens the parameters a bit by doing away with the calendar months, and shows that in any given year, a big bumpy selloff should be expected.

That is, if history is to be used as a guide. And this chart also highlights that big selloffs can and often do happen during years that ultimately see stocks finish higher. It’s the visual representation of saying that stocks usually go up.

“Despite average intra-year drops of 13.9%, annual returns [were] positive in 29 of 39 years,” JP Morgan analysts wrote.

Basically, they’re saying that big scary selloffs are not unusual. It’s just part of the experience of being invested in stocks.

Getting back to October, history isn’t unambiguously gloomy. After Tuesday’s 1.19% selloff in the S&P 500, Bespoke Investment Group published some encouraging research on what follows after volatile October 1s.

“Some of the worst starts to October have been followed by huge gains for the remainder of the month and year,” Bespoke analysts wrote.

“There have now been 14 [instances of the S&P falling by more than 1% on the first trading day of October ] since 1928. ...[T]he S&P has gained an average of 3.75% for the rest of October when it has started the month with a 1%+ decline. For the rest of the year, the S&P has been up 12 of 13 times after a 1% decline on the first trading day of October for an average gain of 7.22%. Bulls would certainly take a 1% decline today if it meant 7%+ gains through year-end compared to the average gain of 2.43% for all years.”

That’s history for you.