On Friday, The S&P 500 clocked in its worst weekly performance since March of 2020. The S&P 500 and Nasdaq ended the week down 8.5% and down 9.8%, respectively. The Nasdaq officially entered bear market territory. Volatility skyrocketed and nearly doubled from 22 to 43, rallying 13 points on Friday alone. This left many investors highly concerned for the future outlook of US equities.
However, we have witnessed many similar market moves over the past decade. We’ve compiled a history of five substantial market pullbacks over the last ten years to provide context. Much like last week’s move, these corrections all saw sharp drawdowns in stock prices and rapid increases in volatility driven by acute market events.
On February 5, 2018, “Volmageddon” occurred. Rising bond yields coupled with inflation fears led to a sell-off. This drawdown was highly exacerbated by heavy volatility trading, largely led by short VIX ETFs that had to hedge their risk as volatility rallied, creating a squeeze - VIX more than doubled during the intraday trading session from 16 to 38. This day became popularly known as “volmageddon.”
The Dow dropped 4.6% intraday, marking its largest point decline in history at the time. Both the S&P 500 and Nasdaq fell 11% from the peak in late-January to the bottom.
From the bottom on February 8, the S&P 500 rallied 11% and the Nasdaq rallied nearly 19% in the 6 months following.
In his first term as President, Donald Trump began a trade war between the US and China. On March 8th, tariffs were imposed from the US on Chinese steel and aluminum imports. In early April, China responded by enacting tariffs on 128 US products, severely escalating the trade war. These US-China trade tensions led to a steep sell-off in US equities, with the S&P 500 and Nasdaq dropping 7% and 10%, respectively, from early-March to the low on April 2.
By October 2nd of the same year, the S&P 500 had gained 13% and the Nasdaq had gained 19% from the April 2nd lows.
Near Christmas, low trading levels and low volatility levels tend to bring about what traders call a “Santa Claus rally.” In December of 2018, this was not the case. Investors were already concerned over US-China trade tensions, and the Fed hiked interest rates to the highest level in over a decade (2.25%-2.5% target rate). Low trading levels unfortunately amplified the drawdown, and the S&P 500 decreased 7%, and the Nasdaq dropped 8.4% during the week of Christmas in 2018, tokening the “Christmas Eve Sell-Off”. From the beginning of the month through Christmas Eve, both the S&P and Nasdaq fell 16%. Ho ho happy holidays, indeed.
In the 6 months following the market bottom on December 24th, The S&P 500 and Nasdaq rallied 20% and 24%, respectively.
In March of 2020, the onset of the COVID-19 pandemic hit markets. This was exacerbated by a Russia-Saudi Arabia oil price war. Fears of a global recession began to echo after markets fell dramatically: circuit breakers were triggered during 4 separate trading sessions.
The market coined the first substantial drop “Black Monday”, a reference to the Black Monday stock market crash of 1987, after which circuit breakers were introduced. Little did we know, Black Monday in 2020 would be followed by 2 worse performing days in the next week.
From the beginning of March through the bottom on March 23rd, the S&P 500 fell 27% and the Nasdaq fell 21%. The VIX traded to incredible highs; surpassing 85 at one point.
The following 6- and 12- month period saw astronomical appreciation in stock prices. Over the 6 months after the March 23rd low, the S&P 500 rose nearly 45% and the Nasdaq nearly 55%. In the 12 months following, the S&P 500 and Nasdaq were up 75% and 86%, respectively.
In September of 2020, concerns over high valuations in tech stocks led to a significant sell-off. This was further accelerated by mass selling in an attempt to profit-take after substantial gains. From the peak on September 2nd to the bottom on the 23rd, the S&P 500 fell 10% and the Nasdaq dropped 13%. The VIX ripped 10 points higher within the span of two trading sessions.
The 6-month performance of the S&P 500 and Nasdaq following the low of the tech-sell off was 21% and 20%, respectively.
Summary Table
While these events seem scary at the moment (watching your investments fall is never fun), do not forget that market pullbacks are an opportunity to buy into the market at lower levels. This can be done via buying stock or selling puts for market entry, which also takes advantage of high volatility levels via premium collected.
When it comes to deciding when the right time is to buy during corrections, it can feel a bit like catching a falling knife: if you grab too early, you’re going to get cut on the way down. There’s no magic 8 ball to tell you when the bottom will appear. The best advice is to start levering in when you feel comfortable, but don’t wait on the sidelines for so long that you miss an opportunity. Invest rationally and don’t forget the age-old adage: buy low, sell high.
S&P 500 Index: A market-cap-weighted index of 500 of the largest publicly traded companies in the U.S.
Dow Jones Industrial Index: A price-weighted index of 30 large, publicly owned U.S. companies, traditionally a barometer of U.S. stock market health for industrial and legacy firms.
Nasdaq 100 Index: A market-cap-weighted index of the 100 largest non-financial companies, which reflects the performance of the most innovative and growth-oriented companies.
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