🧮 Running the numbers

Hey hey, happy Monday!

Summer’s over. It’s back to business.

I’m warming you up with some cold, hard data on stock market moves.

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Wall Street has some bizarre rules of thumb.

One that I can’t stop thinking about is our obsession with 1%.

1% wouldn’t move the needle for many decisions. Imagine going to a clothing store and finding your favorite shirt on sale for 1% off.

Would you buy it? Probably not.

Yet a 1% move in the stock market turns heads. That’s when you start seeing red text, dramatic verbiage (“wow, stocks PLUNGED today!”) and furrowed brows from seasoned market experts. I mean, the S&P 500 fell 3% on August 5 and some people thought the world was ending. It was just 3%, right?

Understanding Wall Street’s market math can be tricky.

So let’s run the numbers, using data from the S&P 500 – an index of the 500 largest publicly traded US public – over the past seven decades.

0.5%

The stock market’s typical day

We often hear about stocks when they’re moving a lot.

But most days in the market are pretty boring.

The S&P 500 has gained or lost less than 0.5% on 53% of trading days, and its median daily change has been about 0.5%.

To put this in perspective, a 0.5% gain on a $100 investment would net you 50 cents.

That seems like an insignificant change, and it is…until you see how small changes add up over time. A 0.5% gain over 252 days – around the number of trading days in a year – amounts to a 250% gain. Although no year in the S&P 500 has ever come close to that return, some of the market’s quietest years have also been its strongest.

You’ve probably heard this advice before, but I’ll put a new spin on it.

Aim to get 0.5% better every day – in life and in your portfolio. Don’t underestimate the small steps.

1%

The “big days” on Wall Street

What about those days that make Wall Street pros sweat?

They don’t happen often. 

The S&P 500 has moved 1% or more in about 20% of days.

So about once a week on average, you’ll see the news fill up with pictures of distraught traders at the New York Stock Exchange.

“Average” doesn’t apply here, though. This isn’t a predictable, once-every-five-days type deal. 

Big up and down days tend to happen together. This is why investing can be rough on the psyche. Crazy periods feel like they last forever, and then, an eerie quiet sets in.

Calm periods can last for months, and they’re a liminal space that your worry-addled brain can’t just exist in.

5-10%

The inconsequential selloffs

Sometimes, those big days can pile up. Suddenly, you’re in a selloff.

People usually take notice once the S&P 500 has slipped 5%. Business news channels start running special programming on markets in turmoil. Podcasters’ voices sound a little more frantic.

Once the selloff hits 10%, Wall Street labels it a correction. A 10% drop may not seem drastic, but it’s enough that people start asking questions about the economy, their jobs, and their futures. 

About 86% of selloffs over the past seven decades fall into these two buckets.

Of these, 70% ended before hitting the 10% mark, and 30% stopped before reaching the 20% level.

These drops are not market crashes.If you’re investing for years, these drops are just blips on the radar. Zoom out, and you can barely find them on a stock market chart.

I’ve labeled them here so you don’t have to squint, you’re welcome:

Small selloffs can feel like crashes, though. For one, they seem to come out of nowhere. One bad yen carry trade, a few meh pieces of data, an Ebola outbreak (ah, the memories), and bam – off to the races! They can materialize regardless of how strong the economy is or how solid the investment picture looks.

Selloffs can also lure you into rash decisions. Every time, you will hear somebody scream that the world is ending. But in reality, about a third of these drops don’t even last a month. And a month is nothing in the grand scheme of decades.

20%

The oft-mentioned, rarely seen market crash

Things start to get serious when a selloff approaches 20%.

Wall Street calls this a bear market. Everyone else calls it a crash, so we will too.

We’ve seen 11 S&P 500 drops of 20% or more – ranging from 22% (the 1956 post-World War II crash) to 57% (the financial crisis).

What defines a crash isn’t just the severity of the drop, though. The market frequently falls this much when the U.S. is dealing with some sort of economic crisis. In fact, seven of the last 10 crashes overlapped with recessions. Crashes are painful because they affect not just your portfolio but also your income and daily life. You can’t escape them by logging out of your brokerage or swiping out of Twitter.

Crashes can last a while, too. Six of these drops lasted over a year, and seven took more than a year to recover.

I’m not trying to scare you. In a way, crashes are when Wall Street’s numbers start to look a little more normal. 20% off is significant in most realms – it’s when that clothing sale starts to look enticing, right?

Crashes are inevitable. They’ve happened about once every seven years on average, so you’ll likely encounter at least a few on your investing journey. With patience (and a little bit of luck), they can be remarkable buying opportunities.

Imagine a 57% off sale at your favorite brand.

Be honest, you’d impulse buy something at that discount. Why are stocks any different?

Numbers are how we make sense of the world, but they’re meaningless without context.

So with that in mind, here’s the most important stock market number for you: 8%.

It’s the average return you would’ve gained per year if you started investing seven decades ago.

At that rate, $1,000 put into a hypothetical S&P 500 fund would be nearly $331K today.

Investing can pay off with patience, resolve and a little bit of number-crunching.

Leave that last part to me.

Thanks for reading!

Callie

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