Don’t Believe This Myth About Big Moves in Stocks

I get one question more than any other…

Friends, family, and other professionals all can’t help themselves.

They know I work in finance. And most all of them watch the news.

Watching the news means one thing. They’re constantly hearing about the huge moves in the stock market.

So everyone wants to know, “What does the recent 2% move mean for stocks?”

The reality is that while the news turns these into big events, they don’t mean much.

And these moves are far more common than most people realize.

Let me explain…

For most folks, looking for meaning in a 2% move doesn’t seem silly.

They think it’s completely reasonable.

The nightly news reports the stock market’s movements every evening.

And on days with “big” changes, it can become the lead story.

Recently we’ve had a lot of 2% moves in the market. And the news has been all over it… talking up these “wild” swings.

So for the average person, a 2% daily move must seem huge… and incredibly rare. But that’s simply not true.

These daily swings are completely normal. They’re a regular occurrence. And we’ve got nearly a century of market data to prove it.

The table below shows what I mean. It shows the average frequency of “big” market moves in the S&P 500 Index since 1927. Take a look…

These results aren’t what most folks would expect. And they’re certainly not what the nightly news would lead us to believe.

The table shows us that on average, 2% moves happen 17 times each year. That’s a lot. It’s more than one per month.

Now, that doesn’t mean that every month will have a 2% move. And there may even be some years with no 2% moves. For example, in 1954, only two moves of 2% or greater happened in the S&P 500. One up, and one down.

Still, these results tell us that a 2% move is not rare. Instead, we should expect to see them pretty often.

If you lower the threshold for a “big” day in the markets, the average occurrences increase substantially too…

In a typical year, we should expect to see market moves of 1.5% or more 30 times. In other words, 1.5% daily moves in U.S. stocks happen more than 10% of the time.

Most people wouldn’t describe that as special. It happens once every two weeks on average. But the mainstream media take it even further.

Usually, any move of 1% or more is described as a “big” day and flaunted as something to take notice of. But the data shows that moves of 1% or more account for 24% of all U.S. market activity.

The reality is, stocks are volatile in the short term. And what most folks view as a wild day is probably nothing out of the ordinary.

This is especially important to remember right now. As we’ve said many times over the past couple months, it’s typical to see some volatility at the end of a long bull market. During the last big “Melt Up” in stocks, we saw a total of five corrections on the way to the blow-off top.

A correction of 10% or more makes a 2% move look like nothing. Yet selling at any of those points would have been a huge mistake.

So don’t believe the myth about “big” daily moves in stocks… And don’t let it scare you out of the markets. The news has got this one all wrong.

Good investing,

Vic Lederman

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Source: Daily Wealth