What Happens After A 10% Decline In Stocks? Barclays Has The Answer

In a report published Wednesday, Barclays' U.S. Equity Strategy team discussed what typically follows a 10 percent decline in the S&P 500.

The analysts, led by Jonathan Glionna, counted 10 instances where the S&P 500 fell by at least 10 percent in four days. The good news for bears: "afterward, it usually went up."

Glionna continued that the largest four-day decline occurred in 1987, which included a 20 percent single-day collapse (Black Monday). He added that 1987 was an outlier, as all of the other occurrences had declines of 10 to 15 percent.

The History Of Collapse

"In every case except 1940, the S&P 500 had positive returns during the five days after the 10 percent decline," the analyst cited in his report. "In two instances (1962 and 2008), the rebound was not sustained and returns over the subsequent 20 days were negative. Still, after 250 trading days the S&P 500 was higher nine out of 10 times, and in most cases it was substantially higher.

Related Link: Expert Reactions Before, During And After The Crash

Glionna noted that financials had the highest excess return in the five days after the decline. However, the rally proved to fail, as financials underperformed over the subsequent 20 and 50 trading days. On the other hand, dividend paying sectors (such as telecommunications and utilities) produced the highest excess returns over the 20- and 50-day period following the initial decline.

Bottom line, history suggests the S&P will rebound. The analyst stated that he "agrees" and his 2015 year-end price target for the S&P 500 remains unchanged at 2100.

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