The latest thinking from Greenspring Advisors.

We Just Experienced A Terrible Month, What Can We Expect Next?

J. Patrick Collins Jr., CFP®, EA

October turned into a month we will all hope to forget.  The S&P 500 ended up losing 6.84% and international stock markets fared even worse.  We thought it would be helpful to research two questions- first, is this normal?  And second, what does history tell us about what we can expect in the near term when we have a bad month like we just experienced.

The month of October ended up being the 64th worst month on record for the stock market (the return data dates back to 1926).  Thankfully, this month pales in comparison to September of 1931 when the S&P 500 lost over 29%!  Last month’s return ranks in the bottom 5.7% of all months on record.  To put it another way, if history is any guide, you would expect to see a month like October about once every year and a half.  We’ve been a little spoiled since the end of the financial crisis because we haven’t had a month worse than October since September of 2011.  So, to answer the first question- yes, last month was perfectly normal.

We found the second question more interesting.  What can we expect next?  Does a really bad month typically precede a major drop in the market?  We decided to look at what happened in the market the three months AFTER the 63 months that were worse than October 2018.  What we found was interesting.  The average return during those other 63 periods we measured was 3.03%.  Remember, this is only over 3 months, so this is a pretty good return that most people would be happy with.  Just for comparison we decided to look at the average return in the market over ALL 3 month periods.  That average return was 2.94%…they are almost identical!  So a really bad month in the market doesn’t really give us any indication of what the next three months will look like.

The lesson- you can’t time the market.  There are no signals we know of that allow you to effectively time when to get in and out.  The best bet is to choose an investment strategy that allows you to live with the ups and downs and then stick with it.