Following the sharp decline observed in the markets, back in February 2018, the specialized media began pouring headlines that anticipated the arrival of the long-awaited market adjustment, after almost a decade of uninterrupted rebound since the Financial Crisis. Moreover, some hastily announced a change in the global financial order.
The apocalyptic oracles eagerly rubbed their hands, and wrote lengthy posts that emphasized why they had been right all this time, and that this was only the beginning of the end. In social networks they tooted their own horns referring to their old notes, that apparently held no due date.
Again, even a broken clock gives the time well twice a day.
Now, everything must keep proportions, the stock market, measured through the S&P500 , saw an adjustment of just over 5% in the first week of February. Yes, this was the largest weekly adjustment since the beginning of 2015, but in the last 50 years it does not even rank among the 35 strongest in this period.
“Stock prices tend to fall faster than they rise, but they tend to go up more than they go down” — David Gardner.
What does it mean that the market tends to fall faster?
Initially, it seems to be a perception associated with human psychology. People resent their losses worse than the upturns; furthermore, we can take a look at the history.
In the last 50 years, the most pronounced fall of the S&P in one day was 20.5%, on the contrary, the largest increase, just 11.6%.
Overall, the worst twenty days of the S&P averaged a 7.4% retreat, against a 6.3% advance in the top twenty.
The second part of the statement is the one that should leave us a little calmer. Data shows that the stock market tends to have a growing trend in the long term, giving an average annual return of 6.8% in the last 50 years.
On the other hand, S&P daily returns of the last 50 years are upwardly skewed with 53% of these showing positive daily returns.
Wrapping up, it is difficult to determine when an adjustment of relevant proportions will begin, for the moment, the market saw a rebound of just over 4% after the adjustment, and remains only 5% below its all-time high.
It seems that it is not yet time to run, but it is well worth taking this break and re-do a thorough analysis of our portfolio, and determine if our risk exposure suits our needs. It is important to carry out the planning always with a cool head, in order to execute it in the best way, under any scenario.
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