Crossing Wall Street Review – February 9, 2018
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (Ticker: CWS)
“There is scarcely an instance of a man who has made a fortune by speculation and kept it.”
– Andrew Carnegie
This week, the stock market’s slumber came to an end. On Monday, the S&P 500 plunged 4.1% for its biggest loss in more than six years.
But that’s not the unusual thing. In fact, a move like that happens, on average, about once a year. Big? Sure. Unprecedented? Hardly.
What is unprecedented was the market before Monday. The S&P 500 went an amazing 404 days without a 5% drawdown (meaning, we were never more than 5% from an all-time high.) That had never happened before. Ever.
The weird market behavior didn’t start on Monday. It ended on Monday.
The S&P 500 recovered some lost ground on Tuesday but dropped a little on Wednesday. Then we got another big leg down on Thursday. The S&P 500 lost 3.75% on Thursday. Two of the three worst days in the market for the last 6-1/2 years happen within four days of each other. Two trillion dollars were erased. Investors got a reminder that stocks don’t always play nice.
Wall Street Awakens from Its Dream
For nearly two years, stock investing was as dull as can be. I know I mentioned this to you several times, but we barely got any ripples. Sure, there were some minor disruptions like Brexit and the election. But those squalls quickly passed.
The fact is, the stock market experienced historically low volatility. Not long ago, the Volatility Index dropped below 9! That’s really, really, REALLY low. This was combined with a relentless series of new highs. It seemed that nearly every day, stock prices went up—by a teeny, tiny amount.
Last week, we finally felt some ripples. Then on Monday, the dam burst. The S&P 500 plunged 4.1%. That’s certainly a bad day, but it seems much larger because it’s such a jolt from the prevailing environment. Consider this stat: From September 6 until the end of January, the market’s largest single-day loss was 0.55%. That’s puny.
The S&P 500 is now officially in a correction, which is defined as a drop of more than 10%. Since January 26, the S&P 500 has lost 10.16%. This is our tenth correction in the last 20 years. Two of those were full-fledged bear markets (down over 20%). What can I say, this is what markets do.