Monday, June 29, 2015

narrow years and shocks to the system

The first half of this year for the S&P 500 was the narrowest in history. In other words, the market’s range from peak-to-trough on a closing basis this year has been a record low, as seen in the table below, courtesy of Bespoke Investment Group (BIG).

If history is a guide, the rest of the year could break to the upside…eventually. In fact, in the prior top-10 narrowest starts to the year, the remainder of the year always had a positive return.

Shocks and stocks

This analysis is in keeping with the history of the stock market around “shocks to the system.”  The data highlighted below should serve to remind investors that although sensational headlines typically garner the most article views and/or reader clicks, market history shows that “crises” often have very quick and limited impact on markets.

[Down only 10.8% for Pearl Harbor and 11.6% for 9-11.]

As you can see, of the 14 crises/shocks in the table above, the average market decline was less than 6% and losses were recovered in about two weeks. S&P did note in the report that accompanied the table that several of the losses were much greater than the average, with longer recoveries. However, those “extreme situations usually occurred with the confines of a long-term bear market and did not precipitate the initial decline. Examples of these include: 1) Pearl Harbor, 2) President Nixon’s resignation, 3) the terrorist attacks on 9/11, and 4) the collapse of Lehman Brothers.”

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