The equities market has experienced a precipitous sell off, but stock exchange traded funds typically eked out a positive return in the following week, albeit at a slow pace.
The SPDR S&P 500 ETF (NYSEArca: SPY) was up 1.5% Tuesday but fell off 8% over the past week, with the S&P 500 index now hovering around 1,920.
According to Bespoke Investment Group, after the 28 times since 1980 the index experienced a weekly plunge of over 5%, the S&P 500 on average was up 0.5%, gained 1.7% over the next four weeks and increased 5% over the next 12 weeks, reports Julie Verhage for Bloomberg.
Additionally, after a weekly 5% or more plunge, the index exhibited a positive return 60.7% over the following week, 60.7% over the following four weeks and 71.4% over the following 12 weeks since 1980.
Tom Lee of Fundstrat Global Advisors also pointed out of the 11 previous times when the S&P 500 fell 9% or more in three back-to-back sessions, the market rose nine of 11 times in the following week, with a median return of 6.9%, reports Alex Rosenberg for CNBC.
Additionally, after three months following the three-day plunge, stocks saw a median return of 7.7%.
“Usually, a waterfall decline marks the end of a correction,” Lee told CNBC.
However, both Lee and Bespoke point out that the history has not always been favorable for a rebound. For instance, after the October 1987 plunge, stocks continued to plummeted 20.6% over the next 12 weeks, and after the October 2008 fall, stocks continued to decline 20.6% over the next 12 weeks.
Lee, though, does not believe we are in a similar position this time around as the economy remains relatively strong and market valuations are still arguably reasonable.
Consequently, for those with cash on hand and if the U.S. doesn’t fall into a recession, this may be a good time to dip back in to equities and capitalize on a buying opportunity over the short-term.
The “speed of recovery” is “proportional to [the]decline,” Lee said.
SPDR S&P 500 ETF
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Max Chen contributed to this article.