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Thursday could be awesome for stocks

Re-posted from Yahoo Finance

The S&P 500 (^GSPC) a plunged a whopping 2.9% on Wednesday, booking its second-worst single-day of trading this year. But is it time to head for the hills?

Historically, major one-day selloffs in the stock market are often followed by strong one-day gains. In a new research note to clients, BMO Capital Markets’ Brian Belski warns that “successfully timing the market on a consistent basis can be an extremely difficult task and even the slightest misjudgment can have a material impact on portfolio performance.”

He demonstrates his point by considering the August 5 market selloff, which saw the S&P 500 drop 3.0% in a single day. It was the worst one-day selloff of the year (through August 13).

“Given the perception of this pullback as the beginning of the end for the bull run by many market pundits and media outlets, some of our clients we spoke to chose to sell out of their equity positions before the pain got any worse,” he noted.

But that proved to be a mistake. The very next day, the S&P 500 jumped 1.3%. In fact, three of the best days of 2019 came in the days following that August 5 plunge (stocks gained 1.9% on August 8 and 1.5% on August 13).

Stocks often rally after major selloffs.
Stocks often rally after major selloffs.

This is not just a 2019 phenomenon. Belski and many of his equity strategy peers long written about how notably weak periods are often immediately followed by notably strong periods.

Is this time different?

It’s worth noting that Wednesday’s selloff follows news that the yield curve inverted for the first time since 2005, a sign that a recession could hit the U.S. economy in the coming months.

But once again, history says we should prepare for a rally.

“After the initial drawdown, the S&P 500 can have a meaningful last gasp rally,” Bank of America Merrill Lynch’s Stephen Suttmeier observed of the inverted yield curve-triggered selloffs. “This rally has averaged 16.7% (12.4% median) with a range of 2.0% (1965) to 28.5% (1989) and lasts 6.7 months on average (2.8 median) with a range of 0.9 to 16.5 months. The 1967, 1978, 1989, and 2005 inversions saw last gasp rallies in excess of 20% on the S&P 500.”

Again, that’s just the history and the sample sizes are small. But as they say, “it’s all we have.”

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