You'd think that stock-market advances would be biggest when times are good. Yet time and time again, the Dow Jones Industrials (DJINDICES:^DJI) has had its best performances when bad news hasn't turned out to be quite as bad as some had expected. In 2016, the Dow's best day came on Jan. 29, when the average rose 397 points to claw back from a terrible opening month of the year. Although the market remained turbulent into February, that day was nevertheless a turning point that set the stage for better performance from the Dow throughout the year.
Let's look more closely at the Dow's best day of the year, and what set in motion the events that triggered it.
Looking back at a nearly 400-point gain
One thing to notice about the Dow's best day in 2016 was that it came in the middle of the worst drop of the year for the average. Before that day, the Dow had already dropped more than 1,350 points since the beginning of the year. On nine days in January, the average fell by triple digits, including five days of 250-point drops. In fact, big moves in both directions were common, with Jan. 29 proving to be the 12th day in January that featured a market move of at least 200 points one way or the other.
Moreover, even after that day, the market didn't regain its confidence all at once. February opened with further declines, and the Dow eventually fell another 800 points before hitting rock bottom and bouncing back strongly. On three days in mid-February, the Dow rebounded by a total of almost 800 points, getting back nearly to its Jan. 29 level, and setting the stage for the run that has taken the average to the brink of the 20,000 mark.
In January investors had many concerns about the stock market that sent the Dow so much lower during the month. On one hand, oil prices continued their 2015 collapse, falling briefly below $30 per barrel, and spurring fears that a global recession could take hold. With so many countries around the world having prospered from high oil prices, the reversal was particularly painful in oil-rich areas, and some feared that geopolitical fallout could spark conflict that would outweigh any beneficial impact on the economy from cheap energy.
In addition, the Chinese stock market suffered a big crash, as investors there feared that slowing growth would cause problems for the globe's second-largest economy. In one month alone, the Shanghai Composite lost more than a fifth of its value, and that sent shockwaves through global financial markets.
Why stocks bounced back
By the end of that turbulent month of January, investors had seen some signs of potential relief. Oil prices bounced back into the mid-$30s, showing that there was in fact a floor to just how much lower crude could fall.
Even more important was the fact that investors started to focus less on the global economy and more on favorable conditions within the U.S. financial markets. In particular, low gas prices put more discretionary income into the hands of U.S. consumers, and with consumer spending playing such a vital role in the overall level of economic activity, the positives involved outweighed any fallout from foreign sources. That's a theme that continued throughout the year, lifting the Dow above 17,000, 18,000, and 19,000 in turn just months after the average hit its lowest point of the year.
What you can learn from the Dow's best day of 2016
The Dow's biggest day of 2016 came at a time when it would have been hard to feel good about buying into the stock market. Yet one thing to notice is that it turned out not to be the only chance to get into stocks at a bargain. Buying either before that day or afterward turned out to give investors cheaper entry points for the Dow, showing that you don't necessarily have to be in a hurry to invest at what appears to be a key inflection point.
Overall, though, buying when the market was full of fear rewarded resolute investors yet again during 2016. That's a lesson that investors will be able to benefit from on countless occasions in the future, especially as new hopes and fears vie for the market's attention in the months and years to come.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.