When things look bleak, many investors tend to overreact, pushing prices down further than they deserve to be
Photo: Getty Images/iStock
The stock market’s nosedive last Thursday and Friday was not the worst two-day plunge in U.S. history.
Far from it.
In fact, contrarians expect the market to bounce back in the coming weeks.
The Dow Jones Industrial Average on Thursday and Friday lost a combined 9.3%. Since it was created in the late 1890s there have been 17 other two-day stretches with losses at least that big. Nov. 6, 2008, was the last such occasion, and one month later the DJIA was 2.7% higher.
That’s just one data point, of course, but it fits the historical pattern, as you can see from the accompanying chart. On average, the market performs far better in the wake of big two-day plunges than it does on all other days.
Some huge two-day plunges in the past occurred during longer-term downturns. But even then, odds were good for at least a dead-cat bounce. Of the 17 two-day past plunges at least as big as last week’s, in 15 cases (88%) the stock market was higher in one month’s time.
This isn’t to say that the market turned up immediately following past two-day plunges. In some cases, the market kept going down, as it indeed appears destined to do on Monday. But in 15 of 17 past cases, the market was higher in a month’s time.
It’s important to emphasize what contrarians are and are not saying. They aren’t denying that there are many sources of concern right now. Most of them would agree that the market deserved to fall in the wake of the announcement of President Donald Trump’s tariffs last Wednesday. But contrarians nevertheless insist that given the history of big drops, the market most likely has overreacted. When things objectively look bleak, many investors conclude that the sky is falling — pushing prices down further than they deserve to be.
It’s also worth emphasizing that contrarian analysis sheds little to no light on the stock market’s prospects over the next 12 months and longer. Of the 17 two-day past plunges at least as big as last week’s, in 12 cases (71%) the stock market was higher in a year’s time. Across all rolling 12-month periods since 1896, in contrast, the DJIA was higher 67% of the time. This increase from 67% and 71% is not significant enough to be the basis of a confident longer-term bet.
The investment implication of this contrarian analysis: Even if the stock market is headed into a major bear market, it’s likely to be higher in one month’s time. Therefore, if you have been wanting to reduce your equity exposure and didn’t do so before this past week’s carnage, there may be no rush to immediately sell in the next few days.
免責聲明:投資有風險,本文並非投資建議,以上內容不應被視為任何金融產品的購買或出售要約、建議或邀請,作者或其他用戶的任何相關討論、評論或帖子也不應被視為此類內容。本文僅供一般參考,不考慮您的個人投資目標、財務狀況或需求。TTM對信息的準確性和完整性不承擔任何責任或保證,投資者應自行研究並在投資前尋求專業建議。