Market, corrected

02/28/20
  • SPX hit correction territory just six days after setting record high
  • Biggest six-day drop in more than 11 years
  • The big question: Is this 2008 or not?

Yesterday when the S&P 500 (SPX) dropped more than 10% below its February 19 record closing price—officially hitting correction territory—you could almost feel the collective “Uh-oh” among investors.

Having blasted through its near-term support levels in recent days, on Thursday the SPX fell 4.4%, plunging below its July–September swing highs:

Chart 1: S&P 500 (SPX), 6/11/19–2/27/20. Correction territory.

Source: Power E*TRADE


The market doesn’t often fall into correction territory over the course of six days—the SPX has only done it 29 other times since 1957—but when it has…

Well, let’s just let the numbers do the talking.

The table below shows the SPX’s average returns at different intervals after dropping 10% or more in six days: one week, two weeks, three weeks, one month, six months, and one year later. The bottom row (% higher) shows how often the index was higher at each point:

Chart 2: S&P 500 (SPX) avg. returns after six-day corrections (1957–present).

Source (data): Power E*TRADE, Standard & Poor's


The big takeaway is that while the SPX had positive average returns across the board, the real upside was most evident on the longer-term horizons: After one year, the index was higher 79% of the time and had rallied an average of 18.5%—that’s more than twice the S&P’s average one-year gain of around 8.3%. The SPX’s 8.7% gain at the six-month mark was also around twice as much as its historical average.1

The returns in the first four weeks weren’t as dramatically bullish, although they were still mostly above average. After two weeks, for example, the SPX was higher 59% of the time and had an average return of 0.5%,  which is a little better than the historical two-week return of 0.3%.

But a key question traders and investors need to ask themselves when pondering the current downturn and looking at these returns is, “Are we back in 2008?” Because if your answer is “no,” you may be more inclined to think the following table, which removes the nine examples that took place that year, offers a more accurate picture of the SPX’s potential path after it slides into a correction in six days:

Chart 3: S&P 500 (SPX) avg. returns after six-day corrections, ex-2008 (1957–present).

Source (data): Power E*TRADE, Standard & Poor's


These stats—similar to the ones discussed yesterday in “Navigating the volatility”—show the market rebounding almost out of the gate, with outsized gains at every interval: After six months, the SPX was higher 95% of the time (in every instance but one—1987, after the Black Monday crash) and had an average return that was more than four times its historical six-month average of 4%.

The point: While the coronavirus certainly presents the global economy with uncertainties, that doesn’t mean what’s happening in the stock market right now is comparable to the 2008–2009 meltdown, which was the worst financial crisis since the 1930s and grew out of systemic problems in the financial system that currently aren’t an issue.

“This time is different” is one of those things you should never say in the markets—no one know when the current sell-off will end. Nontheless, the market has a long track record of posting outsized gains after drops like the one we’re witnessing right now.

Today’s numbers (all times ET): Personal Income and Outlays (8:30 a.m.), International Trade in Goods (8:30 a.m.), Retail Inventories (8:30 a.m.), Wholesale Inventories (8:30 a.m.), Chicago PMI (9:45 a.m.), Consumer Sentiment (10 a.m.), Baker-Hughes Oil Rig Count (1 p.m.).

Today’s earnings include: AES (AES), Wayfair (W).

 

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1 All figures based on S&P 500 closing and intraday low prices, 1/1/1957–2/26/2020. Performance reflects returns after six-day, 10%-or-larger declines that were not preceded by six-day declines of equal or larger size. Supporting document available upon request.

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