Wild Stock Market: No Longer Scary to Investors
Nothing scares us anymore. Well, at the very least, wild stock market fluctuations are nothing to bat and eye at anymore given the craziness we lived through in 2008 (and before that, the crash of 1929 that led to the Great Depression). On the one hand, this is great because more people are buying into the market and staying there despite all the craziness, but on the other hand, that kind of tolerance for a crazy market may mean that it will take a disaster of epic magnitude to scare investors away again.
Pullbacks in the market are necessary to gain an edge, namely since traders enjoy and need to buy stocks at a discount in order to maximize gains. The pullbacks are very drastic and many people follow leads, only to reinvest and get right back into pushing the market to new all-time highs.
However, this comes at a cost. Risk levels are higher than they've ever been before, as discussed in Business Insider.
According to data from Bank of America Merrill Lynch, there has been a recent dynamic movement in the markets when "the S&P 500 fell 1.8% in a single day, which marked a five-standard-deviation move. The index recovered 85% of that loss over the following three days, the second-fastest retracement of a loss that big in S&P 500 history."
Five-standard-deviation moves in the stock market is quite crazy and are quite rare, especially considering that volatility in the S&P 500 had been relatively small as of late. Negative shocks in the market have been happening with increased frequency; in fact, in the past year there have been nearly 3 five-standard-deviation declines that have taken place.
That doesn't seem like a big deal, except when you consider that just 15 such pullbacks have happened since 1928. Hmmm.