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Probability of a Big Drop in Stocks

Published on: Mar 31 2017

This post uses historic data to determine the probability of a significant decline in stocks by the end of 2017. It’s not using fundamental or technical factors to predict a drop at any point. The message is that, based on history, stock investors shouldn’t be too complacent about the steady rise in stocks we’ve been seeing. The odds are, there’s going to be at least a temporary reversal in the coming months.

This time we examine major round-trip corrections, not small hiccups that are later subsumed in major corrections. We elucidate this chart with some examples: there is a 71% chance that (before year-end) we will see at least 1 correction that is 5% or worse. Could be a 15% correction, or could be two 10% corrections. And of course in some years (29% chance) we can go the remaining 3 quarters and see no such corrections at 5% or worse. But we wouldn’t wager on this small chance of no 5% or worse corrections before year end.

The other example we demonstrate is a 32% chance that (again, before year-end) we will see at least 1 correction that is 14% or worse. So not likely, but in 1 of 3 years we can expect to see such extreme corrections in a 9 month period (sometimes more than once!)

 

 

 

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