Just How Serious Was Thursday's Market Decline?

On the face of it Thursday's drop of 312 points (-2.3%) in the Dow Jones Industrial Index is scary stuff. The chart below tells the sorry tale:

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But just how serious is this decline from a historical perspective?

Since the start of the Dow in 1896 we have seen a drop of more than 312 points on 15 occasions. This is really not a very meaningful statistic as one should rather look at the percentage decline to take cognizance of differing index values over the decades. On this basis, Thursday night's decline rates as only the 698th largest in history. Put in another way, we have seen drops of this magnitude or worse, on 2.5% of all trading days over the past 111 years.

And how does the sell-off stack up since the advent of the current bull phase on October 9, 2002? In short, pretty badly. It rates as the second-largest points decline, and fifth-largest percentage decline that has occurred in the past five years ago.

The following table summarizes the largest movements in the Dow Jones Industrial Index since the bear market low in 2002.

I have long maintained that a number of headwinds were arguing against anything more than mediocre returns for U.S. equities over the medium term (see my article on "U.S. equity returns - what to expect"). These include: the lack of compelling value, the rising oil price, the problematic U.S. housing situation and concomitant implications for the consumer, and mean-reverting earnings growth.

And, importantly, it would appear that the yen carry trade, for long the financier of mega-billion deals, has started faltering. The following chart shows the strong inverse relationship between the yen index and the Dow Jones World Stock Index (as a proxy for global equities).

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A meltdown, in the final analysis, comes down to a reassessment of risk. And no chart illustrates this more clearly than the next one showing the Dow Jones Industrial Index behaving almost as a mirror image of the (rising) Volatility Index (VIX).

click to enlarge

It would appear that we may very well be in for a rough patch with the bear about to take center stage for a while.

Source: Unknown

Comments

[wixeywaxy:]

First of all your chart above of the DJI which cuts off all but the but a little more than the last couple of thousand points tends to create an exaggerated picture of the recent rise. This is a typical way people use charts which, although are accurate, can create an impression that recent events are more significant than would be realized if a more comprehensive view would show. Numbers like 200 to 300 points in one day have to be regarded relative to the total to which they corespond. Three percent daily swings are perhaps a bit more than typical but hardly of big significance. When you consider that a one point variation on any Dow component has nearly $7 effect on the average I think we'll need to see more serious signs of market instability before drawing conclusions. Vic

2007 Jul 29 11:31 AM

[Bright Inve...:]

Perhaps the truth of this topic is based on chart comparisons. It is incorrect to use the authors approach to analyze sub prime fear and it's effects on the stock market. It is absurd to make any assumption knowing that the variables are caused from fears brought on by a new historical event. Leo Surprenant

2007 Jul 29 02:04 PM

[Bright Inve...:]

Question: Just How Serious Was Thursday's Market Decline?

Answer: Very Serious!

2007 Jul 29 02:23 PM

[EttU:]

When we have a market which is lead by people who make more money exchanging pieces of paper, or more exact numbers on computers than people or businesses who actually make physical items or things which can be held and used, what should one expect but bad decisions and bad judgment after all it is greed that rules the day. The worst is that so many of the people taking those decisions do it with other peoples money not their own.
AAR

2007 Jul 29 03:31 PM

[Bright Inve...:]

Bravo!

2007 Jul 29 10:19 PM

[Hankhawk:]

I'm concerned as to how much hedge fund trades are affectomg the markets. Because
hedge funds are uncontrolled, nobody knows how powerfullly their transactions
affect stock prices at any time. The average investor is at their mercy. Not
a good sign for the future for us.

2007 Jul 29 09:05 PM