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About That Horrible Start in 2016 for the Stock Market…

“So much of doing well in the stock market comes down to knowing what to expect,” my colleague Morgan Housel once wrote. And knowing what to expect comes from knowledge of market history.

On Monday, the first trading day of 2016, many stock markets around the world fell sharply. For instance, the Straits Times Index (SGX: ^STI) in Singapore tumbled 1.62%, the Nikkei 225 in Japan fell 3.06%, and the Hang Seng Index in Hong Kong lost 2.68%. China was hit especially hard – its market benchmark, the Shanghai Composite Index, lost a searing 6.86% before trading was halted for the day.

In short, it was an ugly start to 2016 and a bleak Monday for many investors. For some investors, the declines may even bring about fears for what lies ahead for Singapore’s stock market. After all, we humans have a tendency to fall prey to recency bias, where undue emphasis is given to recent developments without consideration of longer-term odds.

But, it is the longer-term odds that we should keep our eyes on, as Morgan alluded to earlier. With the aim of sharing Singapore’s market history, I decided to look at the Straits Times Index’s past data to find out the following:

  1. How often has the index declined by 1.5% or more on Mondays throughout history? I had picked a fall of 1.5% as the benchmark here as it is similar in magnitude to the 1.6% decline that the index had suffered yesterday (the first trading day of 2016).
  2. How has the index done a year later from all Mondays in which it had lost 1.5% or more?

Before I dive into my findings, I’d like to point out that S&P Capital IQ is my data source and that my records for the Straits Times Index go back more than 23 years to May 1992. With that, here’s a list of what I found:

  1. There were 1,216 Mondays in my entire data-set. Of those, there were 126 Mondays that had seen the Straits Times Index decline by over 1.5%. In other words, Singapore’s market benchmark has, historically, seen a “1.5%-Monday” more than 10% of the time.
  2. And in case you’re wondering, those 126 Mondays had also occurred across many different calendar years.
  3. For the 126 “1.5%-Mondays,” the Straits Times Index had (a) ended up higher a year later on 76 occasions, or 60% of the time (b) clocked a 10% gain or more a year later on 58 occasions, or 46% of the time, and (c) climbed by over 20% on 46 occasions, or 37% of the time.
  4. I thought it interesting as well that the Straits Times Index had achieved an average return of 14% one year later following a “1.5%-Monday.”

What can we take away from all these? Firstly, a bad Monday is something fairly common in history. Secondly, and more importantly, having an abject Monday in the stock market does not necessarily mean that we’re bound to have a poor year ahead. In fact, like I already mentioned, the market has even stepped up by an average of 14% a year later following a “1.5%-Monday.”

Keep all these in mind the next time you find yourself fretting over the Straits Times Index’s poor start to 2016.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.