The U.S. stock market (S&P 500) crashed 4.1% on Monday. These one day crashes are rare. Here’s what happens historically to the stock market when it crashes more than 4% on one single day (CLOSE vs CLOSE).
Here are the historical cases.
- February 5, 2018 (present case).
- August 4, 2011
- August 31, 1998
- October 27, 1997
- October 13, 1989
- October 16, 1987
- September 9, 1986
- May 28, 1962
- September 26, 1955
- June 26, 1950
*We exclude bear market cases. The Medium-Long Term Model states that this is still a bull market.
Here are the historical cases in detail.
August 4, 2011
August 31, 1998
October 27, 1997
October 13, 1989
October 16, 1987
The S&P crashed the next day (October 19, 1987). Then it made a marginal new low on October 20, which was the bottom of the S&P’s 35% “significant correction”. Luckily our model bought on the close of October 19 and was not crushed by this massive “significant correction”.
September 9, 1986
May 28, 1962
September 26, 1955
June 26, 1950
- Some of these crashes happened in the middle of a “significant correction”. Some of these crashes happened in the middle of a “small correction”.
- The stock market AT LEAST made a 1 day marginal new low after each of these crashes. In the present case, the stock market already made a marginal new low on Tuesday September 6.
- With the exception of 1987, the stock market’s medium term risk:reward profile was bullish. That’s why NOW is the time to buy stocks. The downside risk is limited.
The Medium-Long Term Model does not foresee a significant correction right now. But let’s assume the model is wrong. Let’s assume that this small correction will turn into a “significant correction”. If that happens, then this is still a good time to buy from a medium term risk:reward perspective. For example, the stock market continued to crash for a few days after August 4, 2011. Any losses were quickly erased within 2 weeks.
Read Stocks on February 7, 2018: outlook