The last couple weeks have been rough. How rough, exactly?
If we assume the market closes today at a -3.00% loss, equities will have returned -11.42% year-to-date.
So just how bad is this loss? We can examine other 13-day market periods, going back to 1926, and see where we currently stack up.
Compared to history, this is a 2.97 standard deviation event – rare, for sure, but it has happened before.
It is worth pointing out, however, that if we look at more modern time periods (say, 1950 or after), this is a 3.54 standard deviation event, putting it in the worst 0.5% of 13-day returns.
Name that Crisis
So what periods were worse?
- Pretty much any randomly chosen period during the Great Depression
- End of the 1973-1974 market crash (1973 oil crisis)
- Second oil shock, October 1978
- Black Monday, October 1987
- Russian Ruble default and Long-Term Capital Management crisis, August 1998
- The dot-com bust, September 2001 and late July 2002
- The bankruptcy of Lehman Brothers, September 2008
- Market capitulation of the credit crisis, March 2009
- European debt crisis, August 2011
Naming aside, let’s take a look at what has happened after these events. Working with a modern data set (1950 onward so we aren’t skewed by the Great Depression), we find that after events like this,
- A week later the market is up 2.52%
- A month later, the market is up 2.55%
- Three months later, the market is up 7.12%
- Volatility is the price of admission for financial markets. While the speed of this drawdown is rare, drawdowns of the current size are much more common. Going back to 1950, the market has spent 21.9% of its time in a drawdown greater than the current drawdown. From 1990 forward, the market has spent over 30% of its time in a worse drawdown.
- “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Day-to-day market actions are driven heavily by random noise and behavioral biases, causing dramatic over- and under-reaction to new information. On average, short-term mean-reversion takes control after significant sell-offs to re-align the markets with valuations.
- In times of market crisis, we’re reminded that it pays to look beyond equities for growth potential. 12 of the 16 asset classes in our Multi-Asset Income portfolio universe have out-performed equities year-to-date.
- Investors should stick to their discipline. We are in the midst of a rare event. Emotional, reactionary responses are often more destructive than additive. Vanguard found that when advisors can help behaviorally coach their clients, helping them cut through the noise and stick to their agreed upon discipline, they can add up to 150bp of annual returns.
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