Investors haven’t seen a stock market sell-off like the one they're seeing this week since 2008. According to DataTrek Research co-founder Nicholas Colas, the 2008 market drop started off almost exactly like things have played out on Wall Street this week.
On Thursday, Colas drew a direct comparison between this week’s extreme market volatility and the volatility that started on Sept. 29, 2008. Colas said that date was the day the financial crisis sell-off transitioned from “worried” to “frantic,” sending the S&P 500 down 8.8% on the day.
This type of frantic selling is what investors saw on Monday, March 9, 2020 when the S&P 500 dropped 7.6%. Since Monday, Colas said the trading action between 2008 and 2020 looks “eerily" similar.
On Sept. 30, 2008, the S&P 500 bounced back, gaining 5.4%. On March 10, 2020, the S&P 500 also bounced back, gaining 4.9%. On Oct. 1 and Oct. 2 2008, the S&P 500 dropped 4.5%. On March 11, 2020, the index dropped 4.9%.
Looking ahead, the S&P 500 dropped for six consecutive trading days from Oct. 3 to Oct. 10, 2008, declining a total of 19.3% overall. The S&P 500 opened down by another 7% on March 12, 2020 before being halted due to a circuit breaker.
While the price correlations are extremely similar, Colas said the macroeconomic background is also similar. In the fourth quarter of 2008, investors were waiting to see how Washington D.C. would react to the financial crisis with fiscal stimulus and monetary policy changes. Today, investors are waiting to see Washington’s plan to combat COVID-19. Colas said the 2008 plan was multifaceted and took time to put together and implement, and the 2020 plan will likely be the same.
How To Play It
If the 2008 comparison continues to play out, the sell-off could be just getting started. Colas said investors should anticipate more extreme volatility in weeks ahead.
“The bottom line here: 2008 may not be a precise template for what is still a useful reminder that it is reasonable to expect more 5% drawdown days and there will likely also be some remarkable snap back sessions as well,” Colas said.
For investors with at least a one-year investment horizon and high risk tolerance, Colas is recommending buying at the close on each day the S&P 500 drops at least 5% in a single trading session.
For investors with lower risk tolerance, he recommends patience for now.
“Once we get 5 one-day -5% drawdowns, history says we are halfway through the churn and it is safer to start buying,” he said.
If the S&P 500 is truly at the same stage on Thursday as it was on Oct. 2, 2008, investors can expect the SPDR S&P 500 ETF (NYSE: SPY) to decline another 13.4% over the next month.
Short-term trading in this extreme volatility can be extremely risky, but it’s important to remember that anyone who bought stocks at any point in 2007, 2008 or 2009 ended up making huge profits if they held their positions in the long-term.
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