Is the stock market flipping?

A reader asks:

Ben used the analogy of Seinfeld overturning the Coke machine a few weeks ago to describe the consumer and the economy. The same goes for the scholarship. Hear me out: The yen/carry trade debacle a few weeks ago was the initial impetus. Then yesterday, NVDA fell nearly 10% while the market fell 2%. Are we getting close to the Coke (stock market) car crashing?

One of the reasons Seinfeld has the upper hand all these years later is so much of the show remains relevant to life experiences. Here’s the Coke machine analogy I mentioned on Animal Spirits a few weeks ago:



Jerry was talking about breakups. I was talking about consumer spending. This question is about scholarship.

There is something to the idea that volatility tends to cluster during recessions. Take a look at the 25 best and worst days on the S&P 500 since 1988:

The green and red dots are all pretty close to each other. It’s not like you see everything green during bear markets and red during bear markets.

Bull markets are usually boring. Uptrends tend to occur in slow, methodical moves higher. The big days from below and big days usually happen in downtrends because that’s when investor emotions are high.

People panic sell and panic buy during corrections, bear markets and crashes.

I have this spreadsheet where I keep track of daily price movements, new all-time highs, and declines for the S&P 500 since the 1920s. Here’s a look at the daily price action in the early days of the pandemic since early 2020:

I have a color coding system for big wins and losses, of which there have been many.¹ This is an extreme example, but it shows that during a selloff, the stock market often has huge gains mixed in with ugly losses.

In the last month, we’ve seen a 3% daily drop, a 2% daily drop, and a 2% drop. This minor increase in volatility may be a harbinger of worse things to come in the stock market. A downtrend has to start somewhere.

The markets have been running strong for some time, another correction would not surprise me.

The financial media seems to believe that the stock market has its ear on the ground for a future economic slowdown. Here are some headlines from Tuesday:

The stock market has predicted five since the last recession, but this is another possibility. The economy was hot. The Fed raised rates. They may be too slow to reduce them, which could worsen the economy.

The stock is future-oriented.

Another explanation is that sometimes stocks just drop and there’s no good reason for it. Here’s a look at the number of big down days on the S&P 500 over the past 20 years:

There are bigger down days during big drawdown years (2008, 2020, 2022, etc.), but there are also big down days where you don’t have a market crash.

The US stock market has risen 8 of the last 10 years (including 2024). In the 7 of those positive years (excluding 2020 here), the stock market fell 1% or worse daily 23 times, on average.

Out of 252 trading days per year, that’s about 10% of the time. So even in relatively calm stock market years, one out of every 10 trading days was a big down day. In those same years, the average number of days 2 percent or worse was four. This year there have been three days with 2% or worse.²

To recap, our three potential scenarios right now are:

• The stock market needs a breather.
• The stock market predicts a slowdown in the economy.
• The stock market has to go down sometimes and it doesn’t mean anything.

I don’t know what scenario will play out because I don’t know what the future holds.

The stock market is a short-term manic-depressive, so it’s often difficult to discern its intentions.

If you can’t handle a 2% loss every now and then, you probably own too much stock to begin with.

Big days come with the territory.

We talked about this question on this week’s Ask the Compound:



OG financial blogger Barry Ritholtz joined me on the show this week to discuss questions about what the next recession will look like, creating an investment plan for a cash-strapped banker, paying off a low-interest mortgage, and selling your home. auto.

Further reading:
Minsky Square

¹It’s pretty obvious, but red for losses of 2% or worse and green for gains of 2% or more.

²All 3 have come since the end of July.