How Bad Was Friday's Market Drop

Summary

• Worst 1 day market declines in order of magnitude.
• Friday's decline is ranked #34 out of the 17,652 trading days in the sample. Is that bad enough? I guess it'll do till the really bad day gets here.
• We should be prepared for more pain to come.
• There is good news. On average, these very bad days lead to good outcomes 12 months later.

If this ain't a mess, it'll do till the real mess gets here.

- Tommy Lee Jones, in the film No Country for Old Men

Table 1. Worst 1 day market declines in order of magnitude.

This table shows the 34 worst 1-day market declines since 1950. Friday's decline is ranked #34 out of the 17,652 trading days in the sample. That works out to the 99.8% worst day since 1950. Is that bad enough? I guess it'll do till the really bad day gets here.

In the below table, Max DD is the lowest point reached during the following 3, 6, and 12 months. The % change is where the market ended at the end of 3, 6, and 12 months. At the bottom of the table you'll find the averages for each column of data.

There are a couple of things that jump out at me from this table. The obvious one is the magnitude of Friday's decline. (Which came after 5 prior daily declines, by the way.)

Next is the expected further decline from here. We should be prepared for more pain to come.

Lastly, there is the good news. On average, these very bad days lead to good outcomes 12 months later. The best recovery came in March of 2009, the bottom of the great bear market of 2008.

The worst outcome after 12 months was a further decline of nearly 16%, during the early stages of the tech bubble in 2001.

What comes next.

History tells us that after a big drop like we saw Friday, the market is higher by 19% one year later. There is more pain to come in the short-term, but smart investors will pick their spots carefully to take advantage of what's likely coming next.

If you're a member in good standing of the Intrepid Dip-Buyers Club, and you believe in probability and history, then you should buy this dip with both hands. For the rest of us, it's lookouts below.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[Erik Conley]

clarification: this article was written after the close on Thursday, the 27th. SA editors changed the original headline to Friday, the 28th. Sorry for the confusion.

[Buyandhold 2012]

How bad was Friday's market drop?

Not bad.

Not 22% like the flash crash in 1987.

I would like the stock market to fall quite a bit more, but the Fed always seems to do everything it can to prevent that. The Fed is the biggest bunch of party poopers. Why can't they just let the stock market crash so that I can buy a load of stock at March of 2009 prices? Is that too much to ask?

[Erik Conley]

@Buyandhold 2012 I asked before, how does a guy who claims that he never sells have any cash to invest at lower prices?

[Buyandhold 2012]

Erik,

I am never 100% fully invested.

[Erik Conley]

You can't have it both ways, BH. You're either fully invested at all times or you're a market timer.

[David Haggith]

What I don't understand is why Friday? It was one of the least-bad days in a whole week of ugly.

[User 47924140]

Because certain tickers were and still are over sold. Also on Friday we had shorts covering as well. This coming week is a flip of the coin. We could go back to 27,000 or we could see it plummet back to the 22,000 support line. Either way, I’m keeping my leverage and will sell what margin forces me to. I think the pain will continue. It’s very possible we see 22,000 this week.

[AOTGEN]

I am surprised there is no proof read on these articles. The title had the wrong day as well as the entire article. The thesis was great though.

[Market Map]

Outside of using fact based inference for investing, as a curiosity, we may gain a visual perspective on last month's market activity by viewing it in the context of the last X years ( 8 ) performance ( SP500 ) on a non logarithmic chart.
https://tinyurl.com/vleqrta

So far, the little dip at the very right side of the chart ( Feb 2020 ) doesn't appear to be so "catastrophic"
. . . .
tinyurl.com/y6z8njmp

[Lucky 13]

What's scary is the panic. The virus ain't that bad.

[David Haggith]

Makes one wonder what's wrong with the whole world that there is such mass hysteria over a virus that is simply as contagious as the common flu and far less deadly than MERS, SARS, or Ebola. Maybe not much more deadly than the flu.

[axeandstone]

.5% vs 3% (undev countries). While not bad will be PR’d as 6x as deadly

[David Haggith]

Aye. It's not good, but it is getting massive quarantine efforts that the flu never gets that will make it most likely less deadly in terms of total number killed. The flu this year has sickened thirty-six million people in the US alone, versus COVID-19's 80,000 to date for the entire world, and the flu has already killed 36,000 in just the US. Also, death rates for new viral epidemics usually come down as statistics become broader, awareness of the disease becomes better, and remedies start to become known. So, in the end it may become like many coronaviruses that are no worse than most influenza viruses tend to be. Even now, most people who get it say it was like a bad cold. No one ever said that about SARS, MERSA, or Ebola, even if they were one of the survivors.

[Lucky 13]

I guess my question is why is there more pain to come
in the short term. You reckon the market sometimes does
exactly the opposite of what we think?

[Orion Pax Roosevelt]

Because the global economy us very likely about to grind to a halt and life as you know it is about to change. No one in 1st world countries has everv seen anything like this. Pray the summer heat inhibits this virus.

[User 47924140]

Friday’s drop wasn’t as bad as the other 4 days last week. I only carded a paper loss of roughly $5,000 and a $2,200 loss realized.
The other 4 days was a full blown throat punch. Last week I had a total of $15,000 realized losses and roughly $90,000 on paper. Because I’m energy heavy I’ve already lost about 30% of my portfolio. This coming week could easily send us back to the 22,000 on the SPY. That’s the target I called about one year ago. Obviously we never know when a sell off is going to happen and I was in the process of eliminating my margin when all of this started. I’ve never really worried much about losses on paper for two reasons. One, I won’t need this money for 20 years and two, I’ve only got roughly 10% of my net worth invested in the market. What I will be doing for the next 20 years is adding more and more however. Eventually I will put about 40-50% of my available cash in a basket of more diversified holdings. What I’m doing now is not a long term plan and I wouldn’t advise anyone to invest in the market the way I have the last 2-3 years. I invest in out of favor stocks quit often and wait for the turnaround. I will remain contrarian, but have started heading in a more conservative direction.

[David Haggith]

Appreciate the candid comment.

[lorddarley]

There is a lot of retracement needed, and we will still have a healthy stock market. Remember when Dow 25,000 seemed like a fanatasy? Things just went up too fast.

It hurts, of course, but the world won't end because of another strain of flu. What's scary is the fear that something more serious may show up in later years. With international travel and porous borders, we better get used to it. Bio-defense is the next growth industry.

In the meantime, if you haven't quit already, stop smoking. It is so hard if you were hooked at a young age but it's necessary. This virus, which weakens pulmonary systems, is just another way that a bad habit will kill you.

[Costco_Pizza]

Is this the S&P 500 or the Dow?

[torospartan]

I think you meant to say, how bad was Thursday's drop? Dow was only down -1.39% on Friday.

[dorkmeyer]

That was my thought as well, especially because the date shown in the last (i.e., "34") line of the table is February 27, which indeed was Thursday.