On November 10, 2022, the S&P 500 gained more than 5.5%. The markets were up in response to a better-than-expected inflation report in the hopes that the Fed finally has inflation moving in the right direction. Gains of 5% or more in a single day are extremely rare in the stock market. Since 1950, there have been more than 18,300 days where the stock market was open for business. Of those days, only 23 finished the day with a gain of 5% or more, last week included. That's less than 0.13% of all days. We did some research on this rare occasion, and found some pretty interesting information.
- These daily gains of 5% or more took place during some brutal drawdowns in the market. The average stock market decline leading up to a 5% day was 34%. If you got the benefit of the nice daily gain, chances are you had to endure quite a bit of pain first.
- The market's performance following a 5% day was better across the board (3 months, 6 months, 1 year, 2 years, and 3 years later) when compared to the stock market's average returns with those same time periods.
- Over all rolling 3-month and 6-month time periods going back to 1950, the stock market was positive at the same rate when compared to the 3-months and 6-months following a 5% day.
- However, 1-, 2-, and 3-years following a 5% day, the stock market was far more likely to be positive when compared to all rolling 1-, 2-, and 3-year time periods.
It's important to note that some of these 5% days were followed by quite a bit more pain in the markets (1/3/01, 9/30/08, 12/16/08). We have no way of knowing whether or not the markets bottomed out in the middle of October, or we will go back to set new lows in this current bear market. A lot of damage has already been done in the stock market this year in response to higher inflation. If we have in fact seen peak inflation, it may not be smooth sailing from here on out. If we do see a recession in 2023, we may be facing higher unemployment, lower corporate earnings, and decreasing profit margins. Perhaps that scenario doesn't play out, but some other unforeseen exogenous event shocks the market. Or it doesn't. The takeaway from the research we did on this post is not to dissimilar from other takeaways on our blog, and we suppose that is the market tends to reward the patient, unemotional, and diversified investor.