Opinion – From Grain to Grain: Ibovespa falls by more than 10%; find out what the chance of going up in the next 12 months

Any devaluation of the Ibovespa already leaves any investor upset. But when the drop is more than 10%, anxiety rises and we tend to consider exiting the investment completely. If you’re long on stocks, I’m going to give you good news and bad news.

The Ibovespa plunged 10.1% this April. This is a rare monthly swing.

When evaluating the monthly Ibovespa data since 2000, we found that variations equal to or worse than 10.1% only occurred 15 times out of the 267 months, up to March 2022.

Therefore, negative fluctuations such as April or worse have only occurred in 5.62% of the months since 2000.

The graph above shows the number of times the Ibovespa fluctuated similarly to that shown on the horizontal axis. For example, fluctuations between -2% and 1% occurred in 52 months of the entire sample. Oscillations between 1% and 5% occurred in 49 months. In general, the monthly return was 0.9%.

I present in the table below all the monthly fluctuations of the Ibovespa since 2000.

The first line of the table shows the average return of the Ibovespa in each month. Despite the strong drop in this month of April, the average of returns presented for the month of April is the third best among all months. Second only to October and December.

Which makes the fall even more frightening.

A drop of more than 10% demonstrates an investor’s heightened risk aversion sentiment. Often caused by a negative outlook on the future scenario.

However, investors often exaggerate both optimistic and pessimistic sentiments.

I’m not saying that this month’s devaluation was undue, there was a reason. However, it can be an opportunity. So, I’ll tell you the first news, the good news.

Of the 15 times in which the Ibovespa fell by more than 10.1%, in 60% of them the index appreciated by more than 23% in the following 12 months.

Therefore, there is a reasonable chance that investors are weighing the negative forecast on the economy and the outcome is not so bad.

If we consider the good and bad periods, whenever the stock market dropped 10.1% or more, on average the Ibovespa appreciated 24.25% in the following 12 months. This is reason enough for you to consider not leaving.

Now comes the bad news.

Even though the stock market is mostly very positive in the 12 months following drops like April, the same cannot be said for the following month.

Less than 50% of the time, the month following the fall was positive. To make matters worse, the next month is May.

As can be seen in the table above, the month of May has the worst monthly average return since 2000.

So, for those who are already invested, remember that investing in the stock market must have a long-term horizon.

Those who are outside and have an aggressive profile can evaluate a small investment, but don’t be in a hurry, as the next month has a greater chance of not being good, when we only evaluate the past seasonality.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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