How serious is a 312 point market decline?

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On the face of it yesterday’s drop of 312 points (-2.3%) in the Dow Jones Industrial Index is scary stuff. The chart below tells the sorry tale.

dow-jones-new.jpg

But just how serious is this decline from a historical perspective?

Since the start of the Dow in 1896 we have seen a drop of more than 312 points on 15 occasions. This is really not a very meaningful statistic as one should rather look at the percentage decline to take cognizance of differing index values over the decades. On this basis last night’s decline rates as only the 698th largest in history. Put in another way, we have seen drops of this magnitude or worse on 2.5% of all trading days over the past 111 years.

And how does the sell-off stack up since the advent of the current bull phase on October 9, 2002? In short, pretty badly. It rates as the second-largest points decline and fifth-largest percentage decline since almost five years ago.

The following table summarizes the largest movements in the Dow Jones Industrial Index since the bear market low in 2002.

tabel.jpg

I have long maintained that a number of headwinds were arguing against anything more than mediocre returns for US equities over the medium term (also see article on “US equity returns – what to expect“). These include: the lack of compelling value, the rising oil price, the problematic US housing situation and concomitant implications for the consumer, and mean-reverting earnings growth.

And, importantly, it would appear that the yen carry trade, for long the financier of mega-billion deals, has started faltering. The following chart shows the strong inverse relationship between the yen index and the Dow Jones World Stock Index (as a proxy for global equities).

yen.jpg

A meltdown, in the final analysis, comes down to a reassessment of risk. And no chart illustrates this more clearly than the next one showing the Dow Jones Industrial Index behaving almost as a mirror image of the (rising) Volatility Index (VIX).

vix.jpg

It would appear that we may very well be in for a rough patch with the bear about to take centre stage for a while.

bear-1.jpg
Source: Unknown

More on this topic (What's this?)
The Fair Value of the Dow Jones Industrials --Too Cheap
A Long-term Look at Dividends and Earnings
Bears Awaken From Their Worst Nightmare
Read more on Dow Jones Industrial Average (DJI) at Wikinvest
OverSeas Radio Network

7 comments to How serious is a 312 point market decline?

  • primesub

    check: http://subprimemess.blogspot.com for the latest subprime news..

  • If you want to look at historical differences, the percentage drop is one thing, and the selling restrictions put in place by the DOW on a falling market is yet another. If you want to spin the thing, the absolute drop in constant dollars is also (probably) pretty low. Personally, I would concentrate more on the economic context as the causative agent, which is, even from an historical perspective, in serious decline.

  • […] How serious is a 312 point market decline? On the face of it yesterday’s drop of 312 points (-2.3%) in the Dow Jones Industrial Index is scary stuff. The […] […]

  • stevo

    At this point, the SPX is merely in a corrective phase moving downward towards the 200 day simple moving average. The SPX has done likewise a total of seven times in the past three years. Should this index find support somewhere between 1450 and 1410, its continued uptrend would remain likely. The dramatic increase in VIX and signs of life in the dollar index suggest that a buying opportunity might soon be in prospect.

    A few current bearish implications include a newly inverted yield curve; year over year decline in index value relative to GDP; and a progressive collapse in the ability of the US to keep a lid on the world’s broadening, geopolitical morass. All of these factors are necessary, but not sufficient to rouse the bear from his slumber.

    However, one should not dwell on situations which have already been discounted by the markets. Events are discounted only once, although they are talked about incessantly as their potential for harm fades into oblivion.

    Markets fluctuate — but it is usually unprofitable to call and act upon a top until it actually occurs.

  • It’s a Bear Market, like it or not

    This ferocious Grizzly is not going back into hibernation anytime soon.

    “Prime mortgages” are defaulting at an accelerating rate according to Countrywide, which expects the highest depreciation in housing since the Great Depression. Homebuilder, Horton sees no end in sight to the housing slump. Meanwhile, the investment banks had committed $180 Billion to private Equity buyouts as of the end of May, whose risk they cannot pass on to anyone right now. Tough now, these risky loans will likely be near impossible to syndicate later.

    Leveraged buy-outs typically use 10% equity and 90% debt to finance a deal. When times are good, an LBO group can buy a business for 10 times free cash flow, and with a little management expertise pay the loan back in five or six years from growth. However, what happens when these LBO’s are done at peak earnings and the business shrinks? Those earnings and cash flow drop drastically and defaults become inevitable. The financial system is in grave danger and liquidity has dried up.

    Friday’s drop put us at the 3rd wave of C in the Dow and S&P 500. Expect a follow through lasting several days where 500+ Dow points down days are highly likely.

    http://www.exceptional-bear-market-letter.com/

    Eduardo Mirahyes

  • […] writing an article on Thursday’s 312 point drop in the Dow Jones Industrial Index I did not quite contemplate […]

  • […] other headwinds led to a sharp decline of 312 points on the Dow Jones Industrial Index on July 26 (click here for article), followed by another 208 point decline the next day (click here for sequel article). This created […]

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