What Today’s Stock Market Plunge Tells You About 2016
When it comes to the stock market, first impressions are not as lasting as it seems. That’s the good news, perhaps the only, from the first day of trading of 2016.
Investors hoping to start the New Year on a new page were disappointed on Monday. The stock market fell big on the first day of trading for 2016. The Dow Jones Industrial Average dropped 276 points, or 1.6%. And the S&P 500 was down 31 points.
That gave 2016 the worst first day of trading since 2001, and the sixth worst start of all time, according to Standard & Poor’s analyst Howard Silverblatt.
But here’s the thing: The first day of the year tends to be a pretty lousy indicator of where stocks are headed for the next 251 days of trading. It’s basically a coin toss. The first day of trading has only been an accurate predictor of the direction of the market for the whole year 51% of the time.
Investors are better off waiting to see what stocks do for the rest of the month. But even using January as an indicator is flawed. According to S&P, for 72% of the time, the first month of the year is an accurate indicator of what stocks will do for the entire year. In other words, if stocks end the entire month of January down, there’s a nearly 75% chance that the market will finish 2016 in the red.
Currently, stock market values, as measured by earnings, are historically high. Corporate profits have been weak. The Federal Reserve is raising interest rates. And commodities prices suggest that global growth will be anemic.
All of those are good reasons to believe that 2016 will be disappointing for investors. The fact that stocks have dropped, though, even a lot, on the first day of trading of 2016, is not.