Image: Rafael Matsunaga, Flickr.
Many investors expect the best days for the stock market to come from extremely good news. Yet in the history of the Dow Jones Industrials (^DJI +0.07%), the top performances often result merely from events playing out not quite as badly as everyone feared. That was the case again in 2015, when the Dow's best day was August 26, rising 619 points and posting its third-largest point total in history. Let's take a closer look at what happened to set up the Dow's best day of the year and what investors can learn from it.
Putting the big gain in context
The most important thing to understand about the Dow's best day in 2015 is that it came after a slide that was much larger. Between August 18 and August 25, the Dow fell almost 1,850 points, correcting by more than 10% in just a week's time. On August 24 alone, the Dow was down as much as 1,000 points early in the trading day before recovering some lost ground to finish the day down 588 points. From that perspective, the 619-point bounce didn't even get the Dow back to where it had started the week, and it recovered just a third of the average's losses over the previous week. Even after the rise, investors couldn't feel confident that the worst for the market was truly over.
The Dow's fall in mid-August came after a summer of uncertainty for the global economy. China's Shanghai Composite Index had climbed sharply in the first half of the year, but between mid-June and mid-August, the Chinese stock market index plunged by 40%. Those sharp declines raised fears that China's financial system could be in crisis, further threatening an already fragile economy and taking away one of the key underpinnings of long-term global economic growth.
In addition, investors were nervous about the future path of policy in the U.S. markets. Murmurings of an imminent rate hike from the Federal Reserve made some economists fearful that tighter monetary policy would come too quickly and end the U.S. economy's period of outperformance compared to its international counterparts.
Responding to a potential meltdown
Part of what spurred the rebound in the Dow was the fact that the Federal Reserve seemed responsive to what was happening in the markets and the global economy. New York Federal Reserve Bank President William Dudley made comments that suggested the Fed would be slower to raise rates than most had previously thought, a prediction that later became true as the central bank ended up waiting until its December meeting to make its first rate increase in nearly a decade.
Yet those who've had a long enough experience with major stock market moves will recognize the pattern that resulted in the big up day for the Dow. With stocks having fallen so far so quickly, even the hint of positive news was enough to reverse sentiment and send the market higher. Moreover, the upward move didn't leave the market looking expensive, as the S&P 500 (^GSPC +0.20%) ended up having none of its 500 constituent stocks set new 52-week highs on August 26 despite the explosive trajectory of the index.
The Dow's rise on August 26 didn't mark the turning point for the market correction. Stocks went on to lose ground in the ensuing week and fell below its August 26 close on several occasions in September. Only once October came and dispelled fears of a serious market crash did the Dow rise back toward a positive return for the year.
What you can learn from the Dow's best day of 2015
The Dow's biggest day of 2015 looks like an obvious boon for investors in hindsight. But it's important to remember that at the time, it seemed like nothing more than a brief respite from a volatile and scary market environment. Only those with a long-term perspective can feel comfortable taking on the risk of a rapidly falling market to pick up bargain stocks, confident that given enough time, a company's true value will show through in its stock price.
The lesson for investors here is that having the courage to buy into the stock market at times of maximum fear can be highly rewarding. If you have the discipline to do so, then you'll be fortunate enough to enjoy days like August 26 over the course of your investing career.
