What would a 5% decline in the stock market look like?

Where could it go?  Can you see it happening?  What does history tell us?

The S&P closed on Friday down for the 9th straight day.  Not a good run at all for the major market index.  The fall from the most recent high to low was about 3.30%.

Looking at the history of the moves a weak before the election, Bespoke Investment Group has put together a list of the moves before, and after the election. 

According to their data, the last six elections had gains, with the low being a +0.34% gain (Bill Clinton"s first term in 1992), and the largest being a +6.94% gain (Obama"s first term in 2008). Going back further, there has been only 2 times out of 22, when the stock market has not rallied the final week into an election.  

If the close on Monday (October 31) is the start point of the week before this election, the S&P index closed at 2126.15 on that day.   It closed the week at 2085.18. So it is down about -1.25%.  There is still Monday for the market to snatch victory from the jaws of defeat, and end positive before the election,  but as of now, this year would be the 3rd time in 23 elections where there was a decline.  Not a good start for the new President, whoever it may be.

  

What has happened the week AFTER the election?  

Again according to Bespoke investment Group"s data, the reaction recently has been to the downside.  There have only been 3 times in the last 10 elections where the S&P index ended  higher the week after the election.  

The largest gain was 2.97% after Bush II"s second term victory in 2004.  The largest decline was after Obama"s first term election. In that year, the S&P tumbled -10.62%.. The average of the 7 declines comes out to -3.84%.

I heard a report last week,  that Citibank is expecting a 5% decline on a Trump victory. Judging from the most recent market reactions, a decline is not out of the question.  The market seems to be most negative when Trump polls are doing better. So the direction seems about right, as does the magnitude of the decline (although the fear in me says 5% might be too low given an average decline of 3.84%). 

Assume 5% is what we have to look forward to on a Trump victory (heck it might be the same for Clinton as well), what will a 5% decline look like in the S&P?

Looking at the S&P chart above, a  5% decline would take the price down toward the post Brexit low at the 1991 level (from current levels).  That seems like a logical and perhaps ironic place to bottom.  Brexit was a shock and a Trump victory would be a shock too.   I don"t think that is too far out of the question given the initial reaction.  What do you think? 

What if the market does not really like the idea of Trump at all, and instead of a 5% decline, it has an Obama like 10% decline?  

A 10% move would take the S&P down to the February 24th low at 1891 (see chart above).   From the years high, that would imply a -13.75% decline from the peak.  From the end of 2015 year close, it would imply an S&P decline for 2016 of -7.50%..  Last year the S&P was close to unchanged, but it was down -0.73% on the year. A decline would be first back-to-back down years since 2002 (it actually fell three years in a row by -10%, -13% and -23%. Yikes)

Is that -7.5%  type of decline possible?  

Has the world ever experienced a US president like Donald Trump?  Not really.  But you gotta think that those that love him, expect him to "Make America Great Again". So they should temper the fall. In which case the 5% level might be a good place to stall.  It is certainly at a level that the market will follow.  

On the other hand, if the global investors start unloading "just because they fear a global trade war" (and other hostilities), and market"s overshoot, maybe 1900 might be a stretch but 1950ish might be a compromise level to shoot for on a decline.

History doesn"t always repeat itself, but traders need to be aware of what the road map might look like within boundaries, and plan the trading route accordingly.   What we have seen so far is the impact of fear on the S&P, as the election event comes closer and closer. 

Come Election Day, however, the future becomes more of a reality - a new President will be crowned.  The market will then give it"s thumbs up or thumbs down to the victor.  Will we get an unusual decline into the event followed by a rally after? Or will the market pile on, and go for more blood?  Time will tell.  

What would a 5% decline in the stock market look like?
What would a 5% decline in the stock market look like?
http://www.forexlive.com/feed/news
$inline_image