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Here’s how the stock market tends to trade after brutal selloffs like


U.S. stocks on Thursday booked their worst daily plunge since fears about the economic impact of measures to curtail the spread of the COVID-19 pandemic took root in investors’ psyches back in March.

The Dow Jones Industrial Average
DJIA,
-6.89%

tumbled roughly 1,862 points and the S&P 500
SPX,
-5.89%

lost 5.9% to tally their worst one-day declines since March 16, according to Dow Jones Market Data.

Bespoke Investment Group noted that the broad-market S&P 500’s greater-than-5% tumble, on the back of rejuvenated fears of an emerging second wave of the illness derived from the novel strain of coronavirus and a sobering outlook from Federal Reserve Chairman Jerome Powell, was only the 28th time since 1952, when the S&P 500 converted to a five-day trading schedule, that the index has tumbled by at least 5% in a day.

Five of those declines have been in the past three months alone. The investment and research provider also noted that an unraveling of the market on a Thursday is also a rarity, with all such previous Thursday 5%+ drops occurring amid the 2008 financial crisis and none before that, going back to 1952.

All that said, declines of this magnitude have historically been followed by sizable rebounds in the days, weeks and months to follow (see attached table).


Source: Bespoke Investment Group

Bespoke notes that, on average, the S&P 500 has rallied 2.14% the day after a decline of 5% or more, and has been positive the next day 81.48% of the time.

Of course, the longer the time horizon, the greater the likelihood and intensity of the bounceback. About a year after such drops, the S&P 500 has averaged a gain of 18.92% and has had positive returns 82.6% of the time, Bespoke noted.

Check out the attached chart:


Source: Bespoke Investment Group

It’s important to note that Thursday’s selloff may not represent the end of a bullish phase for stocks after they hit their lowest point in a coronavirus-inspired selloff on March 23.

Keith Lerner, chief market strategist at SunTrust Advisory Services, said that valuations for stocks had gotten lofty after the run-up for equities from their lows. For example, the Dow remains up 35.2% from its closing low on March 23 at 18,591.93, the S&P 500 has gained 34.2% from that low, while the technology-laden Nasdaq…



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