The American Funds recently published the chart I have included below. Its title says it all–Despite Average Intrayear Drops of 14%, Annual Price Returns Were Positive in 31 of 40 Calendar Years. I think that is worth repeating. The stock market delivered positive returns 77.5% of the time in the last 40 years despite the fact that during the typical year the stock market fell 14% on average.
What should you take away from this? Very simply, stock prices don’t go up forever as you know from last year. And downturns in the stock market are a routine occurrence. Yes, sharp market drops like the one we saw to open the New Year can be very unsettling. But the last 40 years of market history show that in most cases the market recovers during the year.
What does that mean to you for 2016? Well, nothing really. No one knows whether 2016 will be similar to 31 of the last 40 years or nine of the last 40. But I like the odds for the long-term, disciplined investor. An investor should never abandon their investment plan just because the market didn’t deliver its average rate of return during a given year.
Nevertheless, recent reports tell us that the U.S. consumer is more confident and in January we received a very positive jobs report–the U.S. labor market created nearly 300,000 new positions in December while the unemployment rate held steady at 5%. So despite the volatility we saw in the global stock market in January that reflected the current chaos in China more than the U.S. economy’s long-term prospects, there are many reasons not to focus on the volatility and to focus on the long-term prospects for the market.