2020 Stock Market Crash

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Summary

Between the 19th of February, 2020, and the 23rd of March, 2020, the S&P500 (^GSPC) fell from 3,386.15 to 2,237.40, using adjusted closing prices. It subsequently climbed back to 3,276.02 on the 22nd of July, 2020. Some people seem to think it will keep going. I expect a massive crash.

To predict the upcoming (?) 2020 stock market crash, I propose examining the market using three techniques:

  • Historical crash analysis
  • Price-to-earnings (or revenue, etc.) analysis that attempts to factor defaults
  • Extrapolating based on the market-to-economy relationship

I could also employ a pure chartist approach, perhaps to give the counterfactual.

S&P 500 data

As much as I love the Dow, it accounts for about 25% of the economy, whereas the S&P500 accounts for around 80%. So I'll likely use the S&P500. I'll download both from Yahoo:

COMPUSTAT data

COMPUSTAT updates its fundamentals quarterly and monthly security files daily. I did a pull of the entire fundamentals quarterly database from 2015-01 to 2020-07. It has close prices, as well as highs and lows. I pulled close, as averaging highs and lows seems like it might be skewed given the context (especially over short time periods).

Historic Crashes

Data before the 1980s probably isn't useful. It was a different world back then, both in terms of globalization and in terms of how stock markets worked. So, I'll start with the 1987 crash and go forward from there. I'm going to suggest three classes of crash, like hurricanes:

Class Description
1 Flash crashes and other short-term market anomalies
2 Short to medium term economic disturbances that are limited to a sector
3 Economic crisis

My starting list comes from a list of stock market crashes.

Using the largest decline on the Dow of the period as the crash day gives:


Data driven approach

Identify crashes as using the largest single-day declines on the DJIA:

Date Adj Close Volume SingleDayChange
10/19/1987 1738.73999 87230000 -22.6%
10/26/1987 1793.930054 35420000 -8.0%
1/8/1988 1911.310059 27440000 -6.9%
10/13/1989 2569.26001 37620000 -6.9%
10/27/1997 7161.200195 91830000 -7.2%
8/31/1998 7539.069824 117890000 -6.4%
4/14/2000 10305.76953 267580000 -5.7%
9/17/2001 8920.700195 565600000 -7.1%
9/29/2008 10365.4502 385940000 -7.0%
10/7/2008 9447.110352 362520000 -5.1%
10/9/2008 8579.19043 436740000 -7.3%
10/15/2008 8577.910156 374350000 -7.9%
10/22/2008 8519.209961 348840000 -5.7%
11/5/2008 9139.269531 264640000 -5.0%
11/19/2008 7997.279785 350470000 -5.1%
11/20/2008 7552.290039 528130000 -5.6%
12/1/2008 8149.089844 321010000 -7.7%
8/8/2011 10809.84961 479980000 -5.5%
3/9/2020 23851.01953 750430000 -7.8%
3/11/2020 23553.2207 663960000 -5.9%
3/12/2020 21200.61914 908260000 -10.0%
3/16/2020 20188.51953 770130000 -12.9%
3/18/2020 19898.91992 871360000 -6.3%
6/11/2020 25128.16992 647780000 -6.9%

Grouping them using 6-month windows gives 9 crashes:

  • 1987/1988: 3 obs (including largest)
  • 1989: 1 obs
  • 1997: 1 obs
  • 1998: 1 obs
  • 2000: 1 obs
  • 2001: 1 obs
  • 2008: 9 obs
  • 2011: 1 obs
  • 2020: 6 obs (and counting, including second and third largest)