The Recent Stock Market Correction in Perspective

Stocks are plunging. And, while the drop has intensified in recent days, the correction actually started a couple of weeks ago. Especially in Europe, where the tensions between Russia and Ukraine are best felt, have stocks been going down for quite a while now. Time to put this correction in perspective. How severe is it, really?

First up is the US stock market. Starting in august 2012, for each week (105 in total), I calculated the 4-week rolling return on the S&P 500 index. I used a period of 4 weeks as an (arbitrary) choice between timeliness and significance. Short enough to ‘feel’ as a correction, but long enough to include downturns that start quietly, but intensify along the way, like we have seen in Europe. Next, I ranked the 4-week returns. The top 10 worst 4-week returns in the last two years are shown in the graph below.

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The graph reveals that the current correction in the S&P 500 index (in red) makes the top 10. As of the close of yesterday (August 5th) the index fell by 3.0%, making it the 7th worst 4-week return in the last two years. That is still quite a bit less than the correction of February this year, when the index dropped over 5%. Moreover, a 3% stock correction is also pretty decent from a longer-term perspective. I should add, however, that at the time of writing the futures are down again (0.3%).

What about Europe? Here, things look a bit more severe. I repeated the same exercise, ranking the 4-week returns, but now for the Euro Stoxx 50 Index. The result of the European ranking is shown in the graph below.

(Click to enlarge)


The correction is more serious, both from an absolute as a relative perspective. Over the last four weeks, European equities are down well over 5%. The current 4-week return ranks third in the top 10 of worst European stock market performances in the last two years. These results seem to confirm that the ongoing conflict in the Ukraine is indeed a dominant factor for market sentiment.

The next graph also points in that direction. Below are the results of the return ranking for the Nikkei Index. The current correction of Japanese equities, as far as a drop of 1.4% can be considered a correction, does not make the top 10. In fact, it ranks just 26th. No severe downturn here.

(Click to enlarge)


The last ranking concerns the 4-week returns of emerging markets. The results for emerging market deviate even more from those in Europe. Based on the close of yesterday, which, as mentioned above, does not include the grim day in Europe that is going on right now, the current 4-week return is still in positive territory (albeit marginally). No correction of any kind here. The results of the ranking are shown in the graph below. The current return period would rank only 56th out of the total of 105 return periods.

(Click to enlarge)


The results of a simple ranking of 4-week returns reveal that the current correction in stock markets is not really global, yet. It might feel differently given the fact that the center of gravity of this correction lies in Europe, and partly in the US. But in Japan and especially in emerging markets things do look not all that bad, for now.


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