What’s an Unusual Year for the Stock Market?

With about three hours to go, the stock market looks to lose about 7% this year. That’s really not so unusual.

Very roughly, the stock market gains, on average, about 1/40th of a percent each trading day. In other words, a $40 stock gains about one penny each day. Yet the standard deviation, meaning the average daily swing, is about 1% each day. That means the daily “noise” is about 40 times the true value each day, again, on average.

On average, the stock market gains about 6% to 7% each year, and the standard deviation is around 15%. So right now, we’re tracking about one standard deviation below the mean. That’s perfectly normal. (No, the stock market is not logonormally distributed, but that doesn’t impact my point.)

Here’s a look at the annual total return of the Russell 3000.

This will only be our second losing year in the last 16 years.

Think of the stock market as a slot machine that offers two payoffs. Either you make 15% in a bullish year, or you lose 30% in a bearish year. The bullish years happen about 85% of the time, while the bearish years happen about 15% of the time.

Of course, that’s not how the stock market really works, but thinking of it in those terms is probably much closer to the true dynamics of investing.

Posted by on December 31st, 2018 at 1:17 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.