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.
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.
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).
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).
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.