Worst Day For Stocks Since June 2020 But What Happens Next?

Worst Day For Stocks Since June 2020 But What Happens Next?

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The author of this article is George Smith, CFA, CAIA, CIPM, Portfolio Strategist. George is a highly accredited writer for LPL Research.

The article was written on September 14th and referencing Tuesday September 13th...

...turned out to be a very bad day for global stocks, as a hotter than expected US inflation report spooked market participants. The CPI report pushed back on some of the peak inflation narratives and all but confirmed that the Federal Reserve (Fed) will hike rates at least 75 basis points at their September Federal Open Market Committee (FOMC) meeting next week (September 20-21).

If we can take a positive from the worst day, George quickly points out that: 

“The S&P 500 and Nasdaq indices posted their worst days since 2020 but based on history such steep daily declines have proven to be buying opportunities for patient investors willing to wait out volatility”

Only time will tell if this is true or not. As always our disclaimer - this is not investment advice. The content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial or other advice. All content on this site is information of a general nature and does not address the circumstances of any particular individual or entity.

We discussed this idea after a different indicator in an episode of the podcast earlier this year, but again it has come up. The idea that the forward looking returns based on the indicator described below look better in non-recessionary periods and worse in recessionary periods. No surprises there.

Analyzing returns back to 2000, both stocks and the VIX simultaneously rising significantly has only occurred 12 times. Half of these occurrences happened at, or close to, short team peaks and as such tends to be a headwind for ultra-short term returns. Only twice has the following day been even marginally positive, and a week out the historic average and median returns are firmly in the red. Looking at 12 month forward returns doesn’t make pretty reading either, unless the returns are segregated into two groups: the average for recessionary periods is -12% (all negative) versus +22% (all positive) in non-recessionary periods.

Stanley Druckenmiller, american investor, hedge fund manager and one of Wall Street's most respected minds in a recent conversation (linked here) said,

I have been doing this 45 years and between the pandemic and the war and the crazy policy response in the US and worldwide, this is the hardest environment I have ever encountered in trying to forecast 6 - 12 months ahead.

The article linked and mentioned above was published on September 14, 2022 and written by George Smith. Check out more articles from George at LPL Research.