Worst Day For Stocks Since June 2020 But What Happens Next?

September 14, 2022

Tuesday (September 13th) turned out to be a very bad day for global stocks, as a hotter-than-expected US inflation report spooked market participants. The CPI report pushed back on some of the peak inflation narratives and all but confirmed that the Federal Reserve (Fed) will hike rates at least 75 basis points at their September Federal Open Market Committee (FOMC) meeting next week (September 20-21).

“To say the market reacted badly to the inflation report would be an understatement” explained LPL Financial Portfolio Strategist George Smith “The S&P 500 and Nasdaq indices posted their worst days since 2020 but based on history such steep daily declines have proven to be buying opportunities for patient investors willing to wait out volatility”

The S&P 500 index slid 4.3%, the worst single day return since June 2020, and at the close was down 17.5% year-to-date. The more growth-oriented Nasdaq 100 saw a daily drop of 5.5%, its worst day since March 2020, leaving it staring down a -27% return year-to-date. As shown in the LPL Research chart of the day, big daily declines of over 4% occur, on average, almost twice a year but cluster around recessionary periods.

View enlarged chart.

Investors looking for some good news can take solace from the fact that following big daily drops, like those that occurred this week, medium-term returns tend to be well above average. The lower proportion of positive returns after such drops does lead to extra caution when interpreting this data.

View enlarged chart.

A warning sign that the market was getting ahead of itself, among some other speculative signs, was that on Monday both stocks, as measured by the S&P 500 index, and the Volatility Index (VIX) were significantly up, by 1.1% and almost 5% respectively. This is an unusual occurrence as normally the VIX, or the fear gauge as it is sometimes known, and stocks have an inverse relationship. When this inverse relationship breaks down and both move significantly in the same direction it can be a sign that the recent trend is about to turn. Both the VIX and stocks moving down can be an indicator of a trough, while both moving up can be an indicator of, at least a short-term, peak.

Analyzing returns back to 2000, both stocks and the VIX simultaneously rising significantly has only occurred 12 times. Half of these occurrences happened at, or close to, short team peaks and as such tends to be a headwind for ultra-short term returns. Only twice has the following day been even marginally positive, and a week out the historic average and median returns are firmly in the red. Looking at 12-month forward returns doesn’t make pretty reading either unless the returns are segregated into two groups: the average for recessionary periods is -12% (all negative) versus +22% (all positive) in non-recessionary periods.

View enlarged chart.

The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) continues to believe stocks are overly discounting the risk of recession in the near term and that economic and earnings growth in the second half of 2022 can still push stocks higher, consistent with historical strong rebounds from shallow bear markets and midterm election year lows. Investors who are willing, and able, to ride out some volatility may be rewarded with above-average returns. Stubbornly high inflation, a potentially overly aggressive Federal Reserve, possible broader military conflict in Europe, and U.S-China tensions still present significant risks, despite not being our base case.







This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

For Public Use – Tracking # 1-05326309

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

The LPL Financial registered representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AL, AK, AZ, CA, DC, FL, GA, IN, KY, LA, MI, MO, MS, NC, NV, NY, OH, SC, TN, TX, VA, WA, WI.

Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

LPL Financial Form CRS