When it comes to stock market losses, I try my best to ignore any drops that aren’t -3% or worse. That’s because that threshold is right around the 1% tail for loss events. When the market dropped yesterday, it was interesting to put it into context based on recent history, precisely because it is a rare event.
So, imagine my surprise to see the same thing happen the very next day. If a drop of -3% is rare, then certainly two in a row must be more rare. And it certainly is:
Unlike yesterday’s chart, it is easy to see that the loss over the last two days is even more anomalous and has only happened twice (in 2011 and 2015) since the Financial Crisis. That seems pretty noteworthy to me!
In terms of the underlying rationale for the market movement, I could make up some narrative about why I think stocks continued to fall for a second day but that can be a game of hindsight bias. The thing I will say though is that for anyone wondering why the market hadn’t seemed to react to the coronavirus yet - well, it sure has now!
Since this analysis is basically a repeat of what I did yesterday, I don’t have some brilliant new insight about two-day drops versus one-day drops. However, I did some analysis to determine how much the market would have to drop tomorrow for me to make this a three-peat article series. The answer is, -2.9%. If the market drops by that much tomorrow then it will be another very rare occurrence and worth mentioning.
In that scenario, the chart above for the three-day loss would go back to 2002. And, even more insane, the four-day loss would go back to 1987! Though, how about instead, we get some good news and we see some green instead of setting interesting market drop records?