5% is the new 20%

Down on the NJ Shore, we’ve recently learned a new saying, “Thursday is the new Friday.”

That’s because we see the traffic backed up in each direction all along Route 35 in Monmouth County now on Thursdays in summer.  This used to happen just on Friday afternoons in summer.  So, Thursday has become the new Friday.

We have another new saying around the office as well, “5% is the new 20%.”

The last significant pull-back the market has seen (meaning a 10% drop or more) was back in January/February.
That is January and February of Last Year.

We have yet to witness a five percent drop this year.

I’m NOT predicting a pull-back, and we are not in the predicting business.

But most folks measure a pull-back in terms of how far the Dow Jones or the S&P 500 Index falls from its’ recent high.  They don’t measure the pull-back on YOUR account.  That actual pull-back could be much more (or, much less) for you.

But here’s the thing: since we have not had a significant pull-back (of 10% or more) in a while, and we have not seen a 20% drop in nearly six years*, keep in mind that next 5% drop in the market is going to make a lot of folks FEEL like it is 20% drop.

And people WILL flip out.
Don’t let that be you.

There are a few mile markers you should keep in your back pocket, as we travel down the road:

• Five percent pull-backs can happen at ANY time, without any news, and without any trigger event.  It just happens, and it is normal.
• Since the 1920’s (nearly 100 years), the stock market has averaged a ten percent pull-back ONCE PER YEAR.

Market pull-backs and corrections rarely stop at “exactly” five percent down, or “exactly” ten percent down.  They tend to over-shoot.  So we can easily see a five percent pullback actually stop at a seven percent drop.  And a “ten percent” pullback could be thirteen percent off the top when  the dust settles.  It’s OK.

The thing we remind ourselves around the office is: unless our indicators are changing, it’s nothing more than a pull-back.  It’s not the beginning of Armageddon.  Remember, Wall Street is the only place in the world where when things go on sale, nobody shows up.  People run in the other direction when Wall Street has a sale, or marks prices down.

*we have not seen a 20% drop in nearly six years: from August-October 2011, the Dow Jones fell 19.8%, based on closing prices.  Using intra-day prices, the drop was a shade over 20%.  Close enough for me.