2015 Stock Market Correction Worst Kept Secret Since Area 51

In 2013, the CIA announced the official existence of one of the governments worst kept secrets, Area 51. It had to be the easiest press releases to write in the history of declassified government information. I'm paraphrasing the official document, but it said "Yep". The barren parcel of land North West of Las Vegas known as Area 51 has been talked about, joked about, speculated about, and movied (I just made a new word) for over 50 years. There is even a band called "Area 51".

After the CIA announcement was made, there were millions of "we knew it's", a few high fives, and many Sci-Fi enthusiast road trips to neighboring Area 51 towns in search of UFOs. It was such a nonevent; I didn't even get a call from my mother.

When the market began to aggressively sell off in August of 2015, not many people were surprised. By not surprised, I mean that people have been expecting a market correction of some type for years. Even though the market correction was expected, there is still a very real pain and fear that goes along with every market downturn.

Academics use the term "Loss Aversion" when discussing human emotion in regards to investing. Psychologists Daniel Kahneman (Nobel Prize Winner) and Amos Tversky are pioneers of the study of Loss Aversion. Their findings show the fear of loss is approximately twice as much as the joy of gain. With the DOW losing more than 1,000 points intraday Monday morning (August 24th), the DOW would need to be up 2,000 points on Tuesday morning just to offset how bad we felt Monday. From a percentage standpoint, the joy you feel from a 12 percent gain is offset by the pain you feel from a 6 percent loss.

Human nature and emotions tell us to make the pain go away NOW! Earlier this week, my five-year-old was playing at a local park where water randomly shoots up from the ground. A child playing nearby got some water in their eye and started crying. A small group of children gathered around to help. One of the older children offered some simple advice, "Pretend it didn't happen and it won't hurt." Sounds like something I would tell my sister when she was crying so I wouldn't get in trouble. Pretending the market hasn't had one of the worst months in a decade won't make us feel any better either.

Much like renowned psychologists Kahneman and Tversky and their "Loss Aversion" study, I have developed a very technical term for market corrections like this, "They suck!" Even though days like today and months like August 2015 "suck", they are a necessary function of the market cycle.

But it's different this time right? NOPE! A recent study by JP Morgan shows the average intra-year drop for the S&P 500 is -14.2 percent! Hard to believe right? From the high point to the low point of the market every year the average intra-year drop is -14.2 percent. Given that, the market has still ended in positive territory 27 of the last 35.

The single worst day in the history of the market occurred almost 28 years ago, October 19th, 1987 (Black Monday). In a single day, the market lost approximately 22 percent. For reference purposes, if the DOW dropped 22 percent today, it would represent a drop of approximately 3,614 points. Without using Google, most guesses would probably be that the DOW finished the year in horrible fashion. The facts are the DOW finished the year 1987 in positive territory, small but positive, up just over 2 percent.

A few years from now we will have to Google what year the CIA officially announced Area 51 and what year the Dow dropped over 1,000 points intra-day.