Stock Market Dropped More Than 10%. What History Says Happens Next. - Barron's

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11:03 a.m. The S&P 500 dropped more than 11% last week, a radical selloff for a market that was only a few days removed from an all-time high. History suggests that a short-term bounce could be in the offing.

Markets don’t drop 10% or more in one week all that often. In fact, its happened just 14 previous times dating back to 1928, according to Evercore ISI data. The returns after such a week have also been pretty good, particularly for the following week: The S&P 500 has averaged a 3.5% rise and was higher 85.7% of the time during the week following a 10% meltdown. The one-month gain wasn’t nearly as good, however. The S&P has averaged a gain of 4.1% but was positive just 57.1% of the time.

So what should investors do? Evercore ISI’s Dennis DeBusschere contends investors should be buying. He offers a decision matrix, based on the above data. First, do you think coronavirus cause problems equal to the global financial crisis, the dot-com bubble, or the Great Depression? If not, do you think the stock market is fundamentally over valued? If the answer to that question is also no, then DeBusschere has one last question: “Why wouldn’t you be buying this market?” he writes.

Of course, it all comes down to your time frame. If i’m a trader, buying Friday’s low made a heck of a lot of sense. As I argued in the Trader column, the market was so oversold following last week’s drop that the odds favor a bounce. That’s what we’re getting on a very volatile market that has seen the S&P 500 drop, rise, drop, rise, drop and now rise again. It’s up 1.1% at 8,663.74, while the Dow Jones Industrial Average is has gained 344.11 points, or 1.4%, to 25,753.47. The Nasdaq Composite has risen 1.2% to 8669.69. And as an investor with, say, a 20-year horizon, it might make sense, as well.

But that doesn’t mean the path is clear. Chances of a recession are growing. Corporate travel is grinding to halt, demand for air travel is falling among consumers, and we can only imagine the impact of businesses if coronavirus spreads in a city like New York. Even now, some consumers may be putting off expenditures to see how this plays out. Personally, I believe that the odds favor a recession this year...a recession that would be right on schedule.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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Stock Market Dropped More Than 10%. What History Says Happens Next. - Barron's
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