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Here’s how ‘rare’ S&P 500’s ‘violent’ reversal was after Thursday’s inflation report — and what history shows may come next, according to Bespoke

The U.S. stock market took an unusual swing after Thursday’s inflation report.

“Shortly after the open, the S&P 500 index had dropped nearly 4% from its pre-market highs before staging an epic rally of over 5%,” Bespoke Investment Group said in a note Friday. “Even in this ‘all or nothing’ type of market environment, reversals of that magnitude are rare.”

Stocks opened sharply lower Thursday as investors assessed a report from the U.S. Bureau of Labor Statistics showing that inflation in September, as measured by the consumer price index, was hotter than anticipated.  All three major stock benchmarks later reversed course, erasing losses and finishing the day with sharp gains. 

“There were only nine other days since 1983 when the S&P 500 fell more than 2% intraday but finished the day up over 2%,” said Bespoke. “The most recent occurrence was over eleven years ago on 10/4/11 and before that, there were five separate occurrences in 2008 alone!”

BESPOKE INVESTMENT GROUP

The chart above shows the remaining large reversals were in 1987, 1997 and 2002.

“We’re not sure when or where the ultimate bottom in stocks will end up, but violent moves like yesterday tend to occur closer to lows than highs,” said Bespoke. 

See: Why stocks scored a historic bounce after another hot inflation report

It’s been a tough 2022 for the stock market amid investor anxiety over the Federal Reserve raising interest rates to combat high inflation. The S&P 500 has tumbled around 24% so far this year, based on midday trading Friday.

Read: Fed’s George urges caution while backing further rate hikes

The performance of the S&P 500 after swings of Thursday’s magnitude have mixed results over the short-to-intermediate term, according to the Bespoke note.

“One year later, though, performance was much more consistent with an average gain of 14.6% (median: 19.4%) and positive returns eight out of nine times,” Bespoke wrote. “People usually forget that long-term rallies emerge out of chaos where investors become increasingly convinced that the only viable path if any exists at all, is lower.” 

The U.S. stock market was down midday Friday, with the S&P 500
SPX,
-1.58%

falling around 1.7%, the Dow Jones Industrial Average
DJIA,
-0.72%

slipping 0.8% and the Nasdaq Composite dropping 2.2%, according to FactSet data, at last check.

The S&P 500 was struggling to hold on to its weekly gains, with the index on pace to decline around 0.8% based on midday trading. The technology-heavy Nasdaq was on track to fall more than 2% for the week while the Dow was heading for a rise of around 1.8%, FactSet data show, at last check.

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