What a Bad Month Means for the Dow's Future

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

As the dust settles after a tough time for the stock market, the Dow Jones Industrials (DJINDICES: ^DJI  ) have put in their worst month since May 2012, falling more than 4%, or almost 700 points. With September having the reputation of being the worst-performing month of the year for the Dow, some investors are concerned whether the Dow is poised for a crash.

But before you decide to bail out of stocks, consider that investors have been wrong before under equally convincing circumstances. Let's take a look back over the past few years to see how well investors did ducking out of the market before autumn hit.

The perfect storm
Perhaps the best argument for selling stocks comes from 2011. That year, the Dow lost 4% in August in the aftermath of the first debt-ceiling debate, as the U.S. lost its "AAA" rating on Treasury bonds. It then went on to fall another 700 points in September as the European financial crisis reached a head, forcing the Federal Reserve to implement new quantitative-easing techniques to stimulate the economy and bring on extreme action from foreign central banks to protect the euro, with Switzerland setting a maximum peg against the European currency.

This time around, we're facing another potential debt-ceiling debate, on top of the potential for conflict in Syria and other hotspots around the world. Emerging economies have seen their growth slow dramatically, and developed economies remain sluggish.

Yet it's important to consider the times when naysayers have been wrong as well:

  • In 2009, the Dow went into September having jumped more than 40% from its March lows, prompting some to call for a halt to the bounce. Yet the rally continued uninterrupted throughout the remainder of the year.
  • In 2010, the Dow dropped 450 points in August, setting the stage for similar concerns to today's. Yet September brought a nearly 775-point gain for the average.
  • Last year, September defied the skeptics again, as the Dow pushed upward by more than 2.5%.

And even in 2011, after that terrible two-month period, the Dow bounced sharply in October, regaining all but 200 points of its 1,200-point loss and setting the stage for a rally that would add more than 2,000 points to the average by the following spring.

Don't panic
You shouldn't conclude from this look back at the past few years that stocks will perform well this September. A further correction wouldn't be unnatural, especially given the strength in the market we've seen since late last year.

Rather, paying too much attention to any given month is the trap you need to avoid. Looking at single-month performance will distract you from the more important task of finding investments that will perform well over periods of years, rather than months or days. If you can filter out the noise of short-term fluctuations and focus instead on long-term performance, you'll have taken a big step toward becoming a better investor.

Ignoring short-term moves is tough, though, and millions of Americans have been so paralyzed with fear that they've stayed on the sidelines and missed out on huge gains from the past several years. Yet The Motley Fool's personal finance experts know that staying invested is important, and they want to show you why and what you need to do to get started. Read their new special report, "Your Essential Guide to Start Investing Today," and start getting the information you need to become a better investor now. Click here to get your copy today -- it's absolutely free.

Read/Post Comments (2) | Recommend This Article (12)

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  • Report this Comment On August 30, 2013, at 5:03 PM, TENOFWANDS wrote:

    Be assured that there are instances where panic is intelligent. OTHERWISE, why would our species, along with all others, have evolved such a facile faculty for panic?

  • Report this Comment On August 30, 2013, at 5:56 PM, Ostrowsr wrote:

    OR, the attack on Syria creates a swift downdraft of say, 200 points, and then it's back to the predictions of 3 or 4 months ago. The 2nd quarter was slow but the 3rd and 4th quarter may show the economy picking up. OR...... fill in your own view. It's always good, when the market has reached an all time high, to have a little cash on hand for a correction. Surely an economy just starting to perk will allow for further gains. The recent "all time high" just broke through the highs of 2007, right? Add inflation of the last few years and there should be 10% or so more upside just to get back to where we should have been before the crisis.

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