Last Updated Oct 2, 2011 7:33 PM EDT
Yet despite the "sky is falling" perspective that is currently being represented in the media and elsewhere in the financial world, a streak of five months of losses is not all that uncommon. According to Wilshire Associates, a consecutive five month losing streak last happened as recently as three years ago in the five months ending March 2008. There has even been a streak of seven months of losses that ended in September of 1974.
T. Rowe Price examined stock market streaks since 1926 and produced this chart illustrating monthly market streaks.
Stocks would have to continue falling for another three months in order to set a record, which I sincerely hope I won't be writing about. On the other hand, stocks have increased for as many as 15 consecutive months. Though I can't predict when this will next happen, I'm willing to bet the farm that people will be going into stocks then, just as they are running from stocks today.
What October is likely to bring
According to the T. Rowe Price analysis, stocks have increased 62 percent of the months and only declined 38 percent of the time. Applying this math, there is a 38 percent chance the streak will continue to six months, a 14 percent chance it will go to seven months, and a slightly greater than five percent chance it will set a new record at eight months.
Unfortunately, pure randomness would have predicted that another 10.5 years should have passed after the March 2008 five month losing streak before we saw it again.
T. Rowe Price took a look at the past to see what happened the month after the streak. If history repeats itself, and I wouldn't bet on that, the odds of setting a new record of eight months of losses is low. The problem is that the 100 percent of the time stocks increased after seven months of losses is based on a sample size of one. That shouldn't give you comfort.
My prediction and advice
I am willing to go out on a limb and say the stock market is a better value today than it was five months ago. In fact, it's an 16.6 percent better value.
Whenever there is a streak, gains or losses, the experts tend to predict the trend to continue. My advice is to recognize that the trend is not your friend. Good times don't last forever and neither do bad. This streak will come to an end and there will be a day when investors wished they had a time machine and could go back to buy the stocks they are now selling. Unfortunately, human beings have not proven to be efficient learners. Those that sold in the early 2009 half-off sale are probably repeating the same mistake today.
Author's note: Charts produced by T. Rowe Price.
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