VOLVER

Will the markets bounce back from this terrible start for the year?

The equity markets have started the year and quarter with fast, steep and continuous falls. On average, equity markets have lost more than 10% in 10 sessions, with volatility spiking accordingly. Actually this is not such a strange situation, happening more than three times a year on average for the last 25 years.

Can we expect a rally?

Methodology

Let us consider some of the main markets in Europe and the US using their indexes: DAX 30 for Germany, CAC 40 for France, FTSE 100 for the UK and the S&P 500 for the US. For Spain we will use the Ibex 35.

To quantify the event we will analyze what has happenned after a selloff of 10% or more during 10 market sessions, similar to what’s happening now. We will register the performance of each index after one week, one month and one quarter, showing average results.

In the Annex we will show those behaviours in greater detail.

Average results

It is quite evident that after a fall such as the current one the markets have been clearly strong on average. This behaviour is superior to the one observed historically at any given week, month or quarter for the last 25 years.

 

Expected returno after a 10% fall or more in 10 days or less

 

We can also notice that the greater the timeframe, the more potential there is. What if we study the results depending on the quarter of the year?

 

Expected return on quarter after a 10% fall in 10 days.

 

We have seen that after the fall, the following quarter shows abnormally positive returns. But what’s interesting is that when the event happens during the first quarter (such as this) the market shows much greater performance than in any other quarter. It is noteworthy that the sample size of the second quarter is too low to be compared against the other quarters.

That’s why we decided to focus on the first quarter events (we found 92) to try and extract some guidance.

 

Maximun, minimum and avergae returns when a 10% fall in 10 days happens during the first quarter.

 

To be noted

Minimum observed returns are similar after one week, month or quarter. However, the longer the timeframe the higher the maximum observed performance. On the other hand, the average returns observed (white dots) also rise with longer timeframes, in line with what we’ve learned.

Our opinion

If we study the history of equity indexes we will find an abundance of events like the one we are studying, 382 in total across the five studied markets during the last 25 years. Thus we don’t consider this as a rare event, it is frequent enough to be studied.

First of all we can observe that after a fall like the current one, on average the equity markets tend to rise more than they do on any given week, month or quarter.

On top of that, we can see that this is specially true when the event happens during the first quarter of the year, such as this one.

And finally, the more we wait the greater the potential we observe: one quarter after the event the average rally is greater, the maximum rally is greater too and in the worst cases the negative excursions are very limited.

Also a great number of observations point to the fact that waiting for a quarter exhibits similar risk to waiting for a week, whilst the potential is clearly superior.

So taking everything into account, it seems that after a fall like the one we are experiencing and specially during the first quarter of the year, the market has shown a clearly bullish bias. Needless to say investment decisions must consider many other inputs, specially knowing that the past has a knack for eluding repetition, however we believe it’s valuable to deal with the facts when emotions tend to rise.

 

Detailed results - Auryn Funds

 

Disclaimer


This document is merely informative and should not be confused with investment advisory. Auryn Funds encourages you to study carefully all the available information and to discuss with your independent financial advisory any investment decision regarding your specific goals, financial situation and particular needs.

The contents of this document are intended for professional public only, not being conceived or suitable for non professional investors or to those people or entities residing in a jurisdiction where its contents are not authorized. This document has been prepared to provide general information about the matter discussed. All the information contained hereby is subject to change without prior notice.