Three cents on the dollar. Three cents is apparently a big deal. I know this because Fintwit (i.e. financial twitter) was abuzz about the market’s 3% down move on Wednesday.
What I’m not sure about is if the “calming reminders” are helpful in any way. So here’s my take.
If a 3% drop brings about a queasy feeling, I’ve got some bad news. Investing in stocks will be a horrendous experience for you.
Because, in the grand scheme of things, 3% is nothing. It’s normal. It’s also forgettable. Because 3% is noise. Making a big deal out of noise makes it louder. I don’t see how that helps anyone.
My guess is the only reason people see it as a big deal is that the market has been fairly boring this year.
Back in February, it got a little exciting, but through the first six months of the year, the market was up a ho-hum 1.6%. Then from July to September, it rose about 5%.
Is it at all surprising that something that rose 5% in such a short time could do the same, only faster, in the other direction? It shouldn’t be.
Now for a serious question. How many people knew what the market did Wednesday? Beyond Fintwit, I bet most didn’t.
How many people knew what the market did over the first six months? Probably not many.
How many people knew what the market did over the last 3 months? Again, betting not many.
How many people know the market is still up roughly 3% this year? I’ll take the under.
How many remember what happened back in February? Can’t recall? Not worried about that 10% correction anymore? Yeah, I bet most have moved on. Time has a way of revealing what’s really important.
And a year or two from now will Wednesday’s 3% drop be important?
Hey, remember that Wednesday a few years back when the market fell 3%? — No one ever.
In other news, someone shared some S&P 500 stats on Twitter (which I failed to like so I couldn’t find it again to share here), but it was a good excuse to update another chart I made a while back.
Below is the S&P 500 along with its underlying stocks. I added the YTD performance to give a better idea of what’s really going on behind the index.
The broader key point is that stocks fluctuate, sometimes widely (and wildly), and not always in the same direction. Another point, as noted by the 52-week high/low spread, is the S&P 500 is made up of 500(ish) businesses that have a value that in no way is always reflected in its price. A lot of sentiment is wrapped into the short-term price. Sentiment sometimes changes quickly. The final point is the S&P 500 index only represents a fraction of the overall story.
And for the finance nerds who want to dive deeper:
- The S&P 500 is up 3.12% (as of about midday yesterday), but
- The average return across all stocks is only 0.59%, and
- The median return is -0.64%
- 193 stocks are performing better than the index
- 312 stocks are performing worse than the index
- 259 stocks are negative on the year
- Only 64 stocks (13% of the S&P 500) are experiencing a personal bear market (i.e. down 20% YTD)
So far this year, cap weighting is giving the S&P a slight boost.
Note: all return numbers are without dividends.
- Lessons from Howard Marks’ New Book: “Mastering the Market Cycle” – 25IQ
- Why The Best Predictor of Future Stock Market Returns is Useless – Of Dollars and Data
- Beware of Market Timing Rules of Thumb (1959) – Insecurity Analysis
- Managing Equity Risk When Rates Rise – Flirting with Models
- The Narrative Giveth and The Narrative Taketh Away – Epsilon Theory
- Time Horizon vs. Endurance – M. Housel
- Should We Have Foreseen This Bull Market? – J. Rekenthaler
- The Funnel of Human Experience – LessWrong
- Why Big Companies Squander Brilliant Ideas – T. Harford
- The Untold Story of Stripe: The Secretive $20bn Startup Driving Apple, Amazon, and Facebook – Wired
- Gamified Life – Aeon