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What Happens to Stocks After Panics Like Wednesday's

Monday, May 22, 2017 8:46

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You probably heard that stocks had their worst one-day fall this year last Wednesday.

Is a big, bad, one-day move something to worry about?

I wanted to find out…

So I asked our True Wealth Systems computers a simple question…

“What has happened to stocks in the past after one-day falls as big as Wednesday’s (or bigger)?”

I didn’t know what we’d find…

Would a big one-day fall be the start of bad times in the market? Or would it be a buying opportunity? Or neither?

Here’s what I found out…

After a one-day fall of 1.8% or more, like we saw on Wednesday, the stock market outperformed over the next year. Take a look:

Since 1950	After a 1.8%-plus one-day fall	All periods
1 month later	1.2%	0.6%
3 months later	2.6%	1.9%
6 months later	4.6%	3.7%
12 months later	8.8%	7.6%

This was based on data going back to 1950. But looking closer, I noticed that most of the recent occurrences were clustered around turning points in the market.

So I ran the numbers again, using 1980 as the start date. (Also, 1982 or so was the start of the “great bull market” that lasted until the year 2000, so the returns for “all periods” starting from 1980 will be better than they were in the table above.) Take a look:

Since 1980	After a 1.8%-plus one-day fall	All periods
1 month later	1.3%	0.7%
3 months later	2.5%	2.1%
6 months later	3.7%	4.2%
12 months later	7.5%	8.6%

When you change the start date to 1980, the picture changes a little…

The story stays the same for the one-month and three-month periods… Stocks outperform over the next one to three months after a big one-day fall.

But then the outperformance disappears over the longer run.

So should you be worried? Not at all. The financial media might make noise about one-day falls like this… But as you can see, the results from similar events in the past 30-plus years are far from frightening.

It seems that a one-day occurrence by itself is nothing to worry about… Stocks have typically outperformed in the months following a big, bad, one-day move.

Wednesday’s move scared a lot of people… Don’t let it scare you…

Good investing,

Steve

Source: http://www.stansberryresearch.com/dailywealth/3550/what-happens-to-stocks-after-panics-like-wednesday-s

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