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.