However, it can be helpful in assessing risks regarding and making marketplace bets on one or more financial marketplaces by taking a subjective look at (and comparing) their given percentage price moves in historical perspective.
Between mid-April and mid-June 2015, an assortment of major stock marketplace benchmarks around the globe attained important highs. From these tops, the slumps have varied in percentage terms.
Of course these playgrounds are diverse; supply/demand considerations regarding each of them are not necessarily identical or even closely similar. Also, for any given stock marketplace, head coaches, players, and those on the sidelines create a great number of competing perspectives and pronounce diverse opinions regarding past, current, and future price levels and trends for a battlefield such as the S+P 500. In establishing and managing their actual marketplace wagers, these observers likewise display a panorama of positions regarding the relationship of a particular stock marketplace to particular economic variables, including other stock, interest rate, currency, and commodity domains.
Nevertheless, in today’s interdependent global economy, this relatively close timing linkage since spring 2015 between the S+P 500 and many other stock signposts probably warns that further declines in them probably (and roughly) will occur together from the timing standpoint. “Marketplace Party Tantrums” (6/15/15) stated: “The S+P 500’s long and monumental bull march following the dreary final days of the global economic disaster (major low 3/6/09 at 667) may persist, but it currently looks rather tired and seems to be ending.”
For predicting (and explaining) price action and trends and other marketplace phenomena, appraising and playing the odds often requires judging probabilities regarding the statements and actions of relevant marketplace participants. Focus on the S+P 500. Suppose the S+P 500 continues to slump from 5/20/15’s all-time high of 2135. Obviously the Fed will look at more than US stocks in making policy decisions. But what do the Fed’s actions since the advent of the worldwide financial crisis in 2007, and in light of its probable view regarding current and near term economic conditions, suggest this guardian will do if faced by this equity downturn?
A five percent tumble from the S+P 500’s May 2015 peak to around 2028 probably would not prompt Fed easing action. A ten percent slide to about 1922 probably would significantly upset the bullish stock crew (especially investors), producing widespread cries for help. The 10pc fall likely would induce heartwarming Fed wordplay aiming to steady prices, and it probably would delay the Fed’s plan to take any next upward step in the Federal Funds rate. It is a close call as to whether a ten percent loss in US stocks would change Fed policy more significantly than this. However, the Fed might move more dramatically (such as via another round of quantitative easing) if it also seriously feared economic weakness in America and around the globe.
A decline of around 20 percent or more in the S+P 500 to around 1708 or lower probably would confirm a “tantrum” in stocks. In stocks, a sustained 20pc fall satisfies many definitions of a bear trend. Most audiences (particularly in America) label bearish stock trends as “bad”. Most stock bulls (especially the praiseworthy “investment” teams and their devoted friends) would be angry at or terrified by such substantial price plummeting. Thus a majority of US stock investors and other fans of rising stock prices surely would want significant steps taken to stop the fall and restart the S+P 500’s marathon bull trend. Many politicians would be fearful, the financial media loud and agitated. This turmoil and talk probably would stretch beyond America.
In any case, suppose around a 20pc stock fall occurred, and that it looked likely to be sustained. Such widespread fears and demands, given the Fed’s devoted allegiance to and pursuit of its statutory mandate, probably would inspire frantic Fed action to rescue and rally the stock marketplace. The greater the fall beneath 20pc, the more determined the Fed’s efforts will become. Their actions at some point could include another round of quantitative easing.
Nowadays, would Fed intervention after stocks declined 20 percent (or more) succeed? Much depends on whether success means merely stopping the decline, or if it implies sending prices near to or higher than the prior peak. The Fed since the major low in March 2009 indeed has succeeded in arresting declines of approximately that amount in 2010 (17.1pc) and 2011 (21.6pc) and propelling the S+P 500 to new bull heights. However, marketplace history is not marketplace destiny. In addition, during the worldwide economic disaster, it did not stop the cratering from 2007’s summit at 20pc. Past success in marketplace games does not necessarily win future victories, even if the Fed may be more determined to use weapons such as money printing than it was in the early stages of the financial crisis. In any case, it is conjectural whether the Fed could stop a S+P 500 decline at 20pc as easily as it did in 2010 and 2011. And even if the Fed is able to steady S+P 500 prices at around 20pc (or lower), it probably will be more difficult than it was after the 2010 and 2011 slumps to rally the index to new highs anytime soon thereafter.
Suppose the S+P 500 managed to achieve new highs above the 2135 level. The Fed probably would respond in the fashion described if faced with such five, ten, and twenty (or more) percent descents.
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Playing Percentages- Stock Marketplace Games (7-13-15)