The Nasdaq saw 28 prior corrections after all-time highs since 1971
The significant drop in the market at the end of last week which continued through Monday is still on the minds of investors. With the Nasdaq Composite (IXIC) pulling back into correction territory — meaning it closed 10% off its recent highs — at the beginning of August, I am interested to see what a bad beginning to the month can tell us about how the rest of it may unfold.
Nasdaq Corrections
The Nasdaq started trading in early 1971. Since then, there have been 28 prior corrections after all-time highs. The first table below shows how the index performed after it first moved to correction territory, while the second shows typical returns since 1971 for comparison.
The results are somewhat mixed. In the first two weeks, the index averages a slight loss, even though it has been positive 71% of the time, which is better than usual (59%). The reason is that when the IXIC falls, it falls hard.
Digging deeper, when the index was lower in the first two weeks, it was down almost 10% on average. Similarly, the one-month return for the IXIC has a lower average return after corrections (0.04% vs.1%), but a better-than-normal median return (2% vs.1.46%).
The longer-term returns are more comforting. Six months after the initial correction, the IXIC averaged a 13% return, or more than double its typical six-month return of 6.2%. At the later timeframes, big moves have been up instead of down. The average six-month returns, which were positive, were of 22.65%, which is higher than the typical positive return which averaged 14%.
Meanwhile, the average negative return in the six months after a correction was smaller in magnitude compared to the average (10.3% vs. 11.9%). Hopefully, the fact the IXIC was on track for a positive session yesterday bodes well for stocks going forward.
Bad Start to the Month
The S&P 500 Index (SPX) fell over 6% in the first three trading days of August. That’s the third worst start to any month since 1950, with only October 2018 and August 2002 off to worse starts. The SPX gained 2.4% and 9.8%, respectively, for the rest of those months, which the table below summarizes depending on the return for the first three trading days of the month.
When the SPX dropped at least 3% in the first three trading days, it went on to gain 0.70% on average for the rest of the month. This is a strong average return, even if returns were inconsistent.
The index was positive for the rest of the month only 48% of the time, meaning it would not be surprising to see heightened volatility in the weeks ahead. In these situations, the average positive of 6.5% and average negative of -4.7% were higher in magnitude than any of the other return buckets.
