Nixon Shock, LTCM, China Devaluation: This Is How Rare 10% Market Corrections Are

LTCM, Asian Crisis, the Nixon Shock and the China Devaluations: these are all examples of 10% corrections and are all, as Deutsche Bank put it, extremely rare outside recessions and almost always associated with a clear unexpected catalyst.

To put last week's non-recession (allegedly) correction in perspective, Deutsche notes that (1) 3-5% selloffs as normal, occurring on average every 2-3 months. Given the emphasis in the market narrative on rates in driving the equity selloff, the taper tantrum saw only a modestly bigger than normal 6% very short-lived sell off; however (2) "10% corrections are rare."

Outside of recessions, when the unemployment rate is falling, there have only been 15 such selloffs since 1950, i.e., in the last 67 years, or 1 every 4.5 years on average.

10% plus selloffs outside of recessions were associated with very clear catalysts that emanated outside the equity market: Oil price collapse; China devaluation; European financial crisis; US credit downgrade; … Russia LTCM; Asian crisis….

And here comes the 1987 analog: the one exception to the above, DB notes, "is the 1987 stock market crash, which we would characterize as reflecting factors internal to the stock market (portfolio insurance); "

And an internal correction is precisely what happened last week, when the initial infaltionary impetus granslated into a self-perpetuating vol-squeeze.

Finally, recessions are associated with 21% selloffs on average. So if recession or growth were the current concern, one could argue the market had put a 50% probability of recession, which considering KKR recently calculated that the probability of a recession in the next 24 months  is 100%...

... is exactly where one would expect it to fall.

Comments

Blankfuck Tue, 02/13/2018 - 11:46 Permalink

Federal reserve fuckers printed and handed to the Banksters free money. Banksters lent money cheap and bought equities. CEO's took money did major stock buy backs to look like their companies do great. Stocks were driven up to levels unheard of! Now whats left? The fucking liar clowns in the media, cnbc and alike, including billionaires that made off with the printed ponzi money! I see business collapsing and going bankrupt around here outside NY. One big fucking game

Blankfuck Tue, 02/13/2018 - 11:46 Permalink

Federal reserve fuckers printed and handed to the Banksters free money. Banksters lent money cheap and bought equities. CEO's took money did major stock buy backs to look like their companies do great. Stocks were driven up to levels unheard of! Now whats left? The fucking liar clowns in the media, cnbc and alike, including billionaires that made off with the printed ponzi money! I see business collapsing and going bankrupt around here outside NY. One big fucking game

DillyDilly Blankfuck Tue, 02/13/2018 - 12:00 Permalink

"Federal reserve fuckers printed and handed to the Banksters free money. Banksters lent money cheap and bought equities. CEO's took money did major stock buy backs to look like their companies do great. Stocks were driven up to levels unheard of! Now whats left?"

 

Rinse & repeat? (After the crash, which comes after the false flag, the sudden entry of a squirrel to look at, and Bruce Jenner deciding to get his dick sewn back on)

In reply to by Blankfuck

B190769Sonny BOHICA2 Tue, 02/13/2018 - 12:42 Permalink

The USA has around $20T in debt.   The anticipated deficit this year is $600 billion plus on a calendar year basis another $250 billion because of the tax cut.  So by the end of 2018 we'll be at $21T in debt.   In 2019, the deficit begins at $1T plus whatever nonsense our "leaders" decide to add.  Treasury buys (aka sells) more short term 2 year instruments because rates are lower.  However, rates are heading northward and should average over 2% in the not too distant future.   Long story short, the US government will pay over half of the amount collected from the US taxpayers for interest on our debt sometime around 2025.   So to answer your questions....How soon will Babylon fall?   Don't buy green bananas.         

In reply to by BOHICA2

0hedgehog Tue, 02/13/2018 - 12:13 Permalink

This phenomenon will become more frequent now that markets are artificially supported. Real markets behave more normally. This market is not real.

Snaffew Tue, 02/13/2018 - 12:30 Permalink

how frequently does the market rise 30 percent in a year?...a la jan 2017 to Jan 2018.  another 20 percent down only washes away the excesses of the previous year...what about the 8 years before that?  It's all perspective and the recent drop was nothing more than a drop in the bucket.

gm_general Tue, 02/13/2018 - 13:02 Permalink

"Outside of recessions, when the unemployment rate is falling, there have only been 15 such selloffs since 1950, i.e., in the last 67 years, or 1 every 4.5 years on average."

But we have actually been in a recession for the last 18 years, considering real inflation adjustments.

juggalo1 Tue, 02/13/2018 - 13:25 Permalink

But KKR calculated the odds of a recession inside 24 months as 100%.  I call bull on that.  Anyone who can forecast a future economic event with 100% certainty has a flawed model.