Last week’s insanity in the stock markets was highlighted by the 1,089-point drop in the Dow in a single day.
From its May 20 high of 2,134 to its August 24 low of 1,867, the S&P was down by as muich as 12.5%. And yet after it was all said and done, the S&P 500 managed to close the week up 0.9%.
But we could also be in the middle of a big upswing.
“Recoveries after 10%+ sell-offs outside of recessions are strong,” Deutsche Bank’s Binky Chadha wrote on Friday. Chadha and his team studied what happened after 13 big sell-offs that didn’t coincide with recessions since 1966. The declines ranged from -8.9% to -31.5%, with a median decline of -12.7%.
“Given clear fundamental catalysts, bottoms took time to form, about 2.5 months,” Chadha found. “In the current context, where much of the selloff looks to have been technical and fundamentals in our reading remain supportive, there is good reason to believe the bottom is in. Recoveries from the bottom have been sharp on average: 3% in the first week, 8% in 1 month, 10% in 3m and 19% in 6m.”
To reiterate, all of this is in the context of non-recessionary environments, which is what appears to be what we have in the US economy today.
Credit Suisse’s Andrew Garthwaite also looked at the history, but came from the calendar angle.
“Into the thinner markets of August, we can get extreme moves,” Garthwaite noted. “
Garthwaite reviewed what happened in the summers of 1966, 1974, 1981, 1990, 1998, 2007, and 2011.
“Historically, the S&P 500 tends to trough on average 53 days following its summer peak (local peak in either July or August), with an average correction of 17% from peak to trough; by comparison, [last] week’s correction saw the S&P 500 troughing at 12% below its July peak,” Garthwaite found. “Typically, it takes around eight months from trough to return to previous ‘summer peak’ levels, and in five of the seven historical cases analysed, the S&P had at least returned to this previous peak within the following 12 months (only in 1981 and 2007 was this not the case).”
It will be interesting to see if the stock market goes up or down from here.