Market shock not without precedent

  • SPX 5-day loss reached 8% early Thursday as Russia invaded Ukraine
  • Move was similar in scope to late-January sell-off
  • Other episodes over past six decades highlight short-term pattern

Although the situation in Eastern Europe deteriorated rapidly in recent weeks, Russia’s invasion of Ukraine sent markets around the globe into risk-off mode on Thursday—stocks fell sharply, while bonds, gold, and the US dollar jumped in “safe-haven” buying.

When uncertainty appears to have the upper hand in the markets, one way to gain some perspective is to turn to something more tangible—for example, the performance of stocks after similar market events.

In addition to simply noting that over the past century the stock market has experienced many other (and arguably much worse) “shocks” and rebounded over time, we can also create a simple model of recent price action and see if it says anything about the market’s shorter-term tendencies in these situations.

Soon after Thursday’s open, the S&P 500 (SPX) was down 2.6%, extending its loss over the past five days to 8% (it later rebounded to close higher for the day):

Chart 1: S&P 500 (SPX), 12/23/21–2/24/22. S&P 500 (SPX) price chart. Sell-off sharp, but not without precedent.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

As unsettling as the situation may have felt, the chart shows the SPX’s downturn was far from unique—in fact, it was comparable to the one it made almost exactly one month ago, when the index fell as much as 9.4% from January 18–24. In both cases the SPX slid to multi-month lows in the process.

If we look for comparable moves—say, five-day declines of 7.5% or more where the SPX also hit its lowest level in at least six months—we find there have been 67 since 1959.1 Some accompanied geopolitical events, others didn’t.

The following chart compares the SPX’s overall average five- and 10-day returns to its returns after these sell-offs:

Chart 2: S&P 500 avg. returns after 5-day, 7.5%-or-larger sell-offs, 1959–2022. Typical returns larger after sell-offs

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)

The SPX’s average returns after moves like the ones it made this week and last month dwarfed its typical five- and 10-day returns. As dramatic as this chart is, though, there are two key things to keep in mind:

1. These are composite results of 67 unique events. The average decline for the 24 times the index was lower instead of higher after five days was -5.9%, and in one case, the SPX was 18.2% lower. (The average gain for the 43 times it was higher was 5.4%.)

2. These figures have no bearing on the market’s longer-term performance. They are simply a snapshot of near-term market performance after a certain type of down move.

The SPX’s behavior after last month’s sell-off illustrates the implications of the second point. The market climbed after hitting the January 24 low—gaining 4.1% in seven days, although not without weathering some volatility—but as we know, that day didn’t turn out to be a long-term bottom.

Finally, it may be worth noting that much of the market’s weakness in recent days was, in many circles, attributed to the uncertainty of whether Russia would actually invade Ukraine. While it’s not the outcome anyone wanted, that uncertainty has been removed. Also, some traders may have noted that while the Cboe Volatility Index (VIX) closed higher yesterday than it did at any point in the late-January sell-off, it never reached its January 24 high.

There’s no such thing as certainty in the markets, but understanding that there are few truly unprecedented events, and knowing what has happened after similar episodes, can help traders and investors maintain their bearings when it feels like the market isn’t.

Today’s numbers include (all times ET): Durable Goods Orders (8:30 a.m.), Personal Income and Outlays, PCE Price Index (8:30 a.m.), Consumer Sentiment (10 a.m.), Pending Home Sales Index (10 a.m.).

Today’s earnings include: LendingTree (TREE), Foot Locker (FL).


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1 All figures reflect S&P 500 (SPX) daily price data, 12/1/59– 2/24/22. Performance statistics reflect returns following a day with a low at least 7.5% below the closing price five trading days earlier, that is also the lowest low of at least the past six months. Supporting document available upon request.

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