China's woes are taking their toll on U.S. stocks once more, with the Dow Jones Industrial Average (^DJI 0.13%) and the benchmark S&P 500 (^GSPC +0.11%) both down 2.39% at 1:30 p.m. EDT.
The headlines yesterday sounded alarming:
Wall Street's worst month in three years ends on a sour note (Reuters)
Stocks Set To End August With Biggest Monthly Decline Since 2008 (Dow Jones)
Dow posts worst August decline in 17 years (MarketWatch)
U.S. Stocks Decline as S&P 500 Posts Worst Month Since May 2012 (Bloomberg)
But this says more about the myopia of the financial press than the gravity of the situation for long-term investors (traders are another matter, particularly those who are leveraged).
It's true that, as months of August go, last month was pretty awful. With a loss of 6.3% for the S&P 500 (excluding dividends), August 2015 posted the sixth-worst performance for a month of August since 1950. The five instances that exhibited a worse performance are all associated with a bear market or a specific negative event:
|
Year |
Monthly Return, S&P 500 |
Context |
|
August 1998 |
(14.6%) |
Aug. 17: Russia devalues the ruble and defaults on its debt. |
|
August 1990 |
(9.4%) |
Aug. 2: Iraq invades Kuwait. |
|
August 1974 |
(9%) |
Stock market crash of 1973-1974. |
|
August 1966 |
(7.8%) |
Vietnam war, secular bear market of 1966-1982. |
|
August 2001 |
(6.4%) |
Technology share collapse, secular bear market of 2000-2009. |
Let's put that in context: If the last 66 years are representative, you should expect to experience a month of August that is as bad or worse every 11 years (the ratios 1:11 and 6:66 are equal).
Does that matter? (Don't answer -- I'll come back to this.)
Are the months of August really that special that we can only compare them among themselves? Once you extend your field of comparison to the entire calendar, things look worse still: August 2015 was in the bottom fifth percentile going back to Feb. 1950 (it turns out that August is one of the most volatile months in the calendar).
Does that matter?
If your time horizon is equity-appropriate (10 years, at a minimum), and you're currently a net buyer of stocks, the answer is no.
Why?
Stocks are volatile -- that's one of the reasons you expect to earn a higher return from them than bonds. Furthermore, equities are a long-duration asset (longer than most bonds), so it makes no sense whatsoever to fixate on a single month's performance (or even a single year, for that matter).
Jason Zweig is one of the few financial journalists worth reading. Today, he tweeted a timely graphical reminder of the magnitude by which long-term returns dominate short-term volatility:
For many people the pain is real, but can you spot the 2015 "correction"? #WSJ pic.twitter.com/s2N3vF6z0C
— Jason Zweig (@jasonzweigwsj) September 1, 2015
The picture of the linked chart is a bit small, so I've reproduced a similar one below. This is a long-term chart of the S&P 500, on a logarithmic scale:
Sort of puts things in perspective, doesn't it?
