The Days After the Big Days

Posted by: Ben Steverman on June 9, 2008

In my ‘in box’ this morning appeared more evidence that the stock market’s movements from day to day are almost entirely random.

The Dow Jones Industrial Average dropped almost 400 points on Friday. What, you might ask, does a big stock drop on one day predict about the next day’s market movements?

Almost nothing, according to Marc Reinganum, director of quantitative research at OppenheimerFunds Main Street team (OPY), who bases his conclusion on more than 80 years of data.

Reinganum says:
“History suggests that, by itself, a one day -3% decline contains little information about the direction of the markets on the next day. Since 1926, following a -3% market decline, the market experiences nearly flat returns with an average drop of -7 basis points.”

Markets have a one-in-ten chance of declining by another 3% or more, but they also have a 10% chance of bouncing back more than 3%.

That lines up with other data suggesting it’s almost impossible to predict short-term moves in stock prices. So I think Reinganum is right when he concludes: “Investors should maintain their investment strategy and not react to short-term hiccups.”

(By the way, it turns out that stocks barely budged on Monday after Friday’s sell-off.)

Reader Comments

Will

June 9, 2008 6:49 PM

This isn't really anything new. Burton Malkiel has been saying it for 35 years.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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