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When Bad Months Lead to Good Years Thumbnail

When Bad Months Lead to Good Years

Mike Earl, CFP®, CPWA®

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January is going down as a tough month in the markets (putting it mildly). As I write this article on January 31st, 2022, the US stock market is down about 6.5% for the month. That is not one of the 15 worst months in US stock market history since 1950, but it’s a bad one.

To make matters worse, bonds did not offer any protection this month, with the total US bond market down over 2% thus far in 2022. In bond land, down 2% is a really bad month, as bonds typically do not move that much in a whole year, much less a single month.

Quoting declines as percentages is not as painful as quoting declines in dollars. Our clients tend to open account statements and compute their decline in dollar terms – not percentage terms. And a 6.5% decline is awfully painful when looked at that way:

Nonetheless, I am here to bring you some good news! What goes down must go up (eventually, anyway). Very bad months typically lead to very good subsequent returns.

Following the 15 worst single-month returns in the US stock market (since 1950), the market was higher one year later in 12 of those 15 instances (an 80% “win rate"). The average return in that 1-year following was 22.9% (median return of 27%).

Are you at all surprised by our message to stay the course? In life and in investing, there are no guarantees. This bad month could portend further declines. But mathematically, you have better-than-normal odds of investment growth following a steep decline in the stock market.