Active Trader Update
Kass: Why a 25% Drop Isn't Out of the Question
08/21/07 - 12:49 PM EDT
So, using historic equity returns, the stock market would have to be down by about 25.4% in order to have a comparable six-sigma event to the one that the Loan Index recorded in July 2007. According to Yale University's Robert Shiller, there have only been two six-sigma monthly drops in the equity market in the past century. In November 1929, stocks dropped 26.5%, or 7.8 standard deviations away from the average, and in April 1932, stocks fell by 24%, or 6.4 standard deviations. In recent years, the largest monthly loss came in November 1987, when equities had a 12.5% swoon, representing 3.07 standard deviations from the average. I am not saying that the recent six-sigma event in the Loan Index must necessarily translate into a six-sigma event in equities. Rather, the purpose of today's opening missive is to put the Loan Index's drubbing into an equity context. What I do know is that the S&P 500 is only about 6% or 7% lower than the six-year high achieved in mid-July. My personal view remains the same: I do not believe that the equity markets' decline is anywhere near over, and I do believe that the recent dip has not incorporated the full impact of the deteriorating credit cycle. I suspect, in the fullness of time, a cumulative decline of 20%-25% would not be surprising. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.
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