Sunday, January 05, 2020

Shocks And Market Impact

From time to time investors are faced with unanticipated shocks to the market. With tensions in the Middle East, and specifically Iran, elevated again, the market will undoubtedly react to events over the course of the next few days, weeks and months. Investors should know though, the shock and damage to the equity market from these shocks historically are short-lived.

S&P Dow Jones Indices issued a report in 2013 that covered shocks and crises and the impact on the equity market, specifically the S&P 500 Index. Below is a table from S&P's report showing the time it takes for the market to bottom and then the time to recover the loss resulting from the particular shock event. On average, the initial shock sees the S&P 500 Index down 2.5% on the next trading day, the bottom was reached after six days. The loss in the market was then recovered in 14 days. One recent shock that occurred after the S&P report date was Brexit on June 23, 2016. The S&P 500 Index fell 3.5% the next trading day, bottomed in 2 days when down 5.3% and recovered the loss eight days after bottoming.

As S&P's report notes, shock events that have a negative impact on economic activity tend to be the ones that are more consequential to the market. Historically, market declines that result from these shocks have more often than not been buying opportunities for investors. One thing investors should be prepared for though is the fact the market may experience an elevated level of volatility near term.

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