After one of its worst days in market history on Thursday, the SPDR S&P 500 ETF Trust (NYSE: SPY) and the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) each opened higher by more than 6% on Friday, continuing the streak of extreme volatility in the stock market this week. Even with Friday's recovery, the Dow and S&P 500 are having their worst week since 2008.
Periods of extreme volatility like these can be extremely difficult to predict and trade in the near-term, but they are not unprecedented in the market’s history.
History Of Volatility
Loup Ventures analyst Doug Clinton took a look at other periods of major market volatility over the years. Clinton noted the S&P 500 has closed up or down more than 3% on seven of the past 10 days, a phenomenon that has occurred only six other times.
The past two times it happened coincided with the 2011 U.S. credit downgrade and the 2008 financial crisis. Clinton compiled the six previous periods of extreme volatility in the table below.
After looking at the data, he said there is a clear dichotomy in the ultimate outcomes following the previous six periods of extreme volatility. Three of them ultimately resulted in a severe economic impact, whereas three of them only resulted in a modest-to-minor economic impact.
“It feels like the market is deciding where the current economic situation fits,” Clinton said.
He said significant further downside for stocks over the next several weeks would seem to suggest the market is pricing in one of the more severe economic outcomes, such as the Great Depression or the 2008 financial crisis.
How To Play It
For now, Clinton said investors should take the smart approach of preparing for the worst and hoping for the best.
“While there is undoubtedly more volatility to come, we think the current market dynamic will create a fertile environment for long-term, growth-oriented investors like ourselves and our limited partners,” he wrote.
TD Ameritrade's chief strategist JJ Kinahan told Benzinga investors should expect the market volatility to continue, but they shouldn’t overreact and dump everything just because they are feeling scared.
“If you’re super freaked out, the first thing you want to do is don’t go all out. That’s the mistake people have made in the past. It’s hard to sit there and watch this. It’s hard for everyone. What professionals do is take off a small portion and reassess,” Kinahan said.
He said now is a good time for an investor to consider his or her investing time horizon and risk tolerance.
“You don't want to be emotional, but it’s your money. It’s hard not to be emotional. That’s why you think in small terms. Sell a little bit if you have to,” Kinahan said.
If you are losing sleep over the trading action in the past month or so, you may have too much exposure to stocks relative to your investing timeline. If you have an investing timeline of a year or more and are still feeling overly distraught, the issue may be more about better managing your emotions rather than changing your investing strategy.
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