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Visualizing Violent Market Drops Since 1928

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They were once common, then were rare from 1950-79. But the past 30 years have seen a resurgence.

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Last Thursday's market plunge was the largest point-wise drop in history. But how does it stand up percentage-wise and how many drops greater than 5% have we seen?

Please consider the following visualization of violent market drops (it takes a few seconds to load).



Thanks to Ellie Fields and Ross Perez at Tableau Software for help with the display!

Volatility Increases in Periods of Deflation

As you can see above, major drops, such as the one last week, were once very common, then almost never happened from 1950-1979. However, the past 30 years have seen a resurgence of violent dips.

The late 1920s and 1930s were characterized by deflation, the 1980s by stagflation, and in the 2000s, deflation and deflation fighting by the Fed were both back in play.

Those familiar with Kondratieff Cycle theory will note that stagflation and deflation are on opposite poles (summer and winter), with deflation being the more violent. Please see Gold and the K-Cycle for more on the Kondratieff Cycle.

My friend "HB" writes:

The further increase in volatility is bearish. We often see that right at the beginning of major bear markets. You get some single-day rallies that really impress everyone. We had one of those after the August 2007 swoon for instance.


Yet, the DJIA has never -- not once -- rallied 400 points during a bull market. Every single 400-point or more rise was in the context of major bear markets.

Those huge bear market rallies were all taken back and then some. Monday's Euro bailout lovefest will be no different.

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No positions in stocks mentioned.
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