Chaotic Carnage In The S&P 500

It was just two and a half weeks ago when we declared that a relative period of order had come to an end in the U.S. stock market. What we left unsaid however is that whenever the market leaves order behind, it is taken over by the more chaotic elements of its nature, which is a concept that we presented less than a month and half ago.

So we cannot say that we were terribly surprised to see such rapid and large changes in the S&P 500 after having observed its previous period of order break down. The following chart updates the one we presented just two and a half weeks ago to show where the S&P 500 sits as of the close of trading on 5 February 2018 with respect to that previous period of relative order.

In our previous discussion, we had compared the breaking of order in the S&P 500 with the bubble that formed in the U.S. stock market after the passage of the Tax Relief Act of 1997, arguing that the current day break in order wasn’t of the same nature as that previous chaotic episode. Events have since proven that observation to be correct – it’s definitely not the same kind of disruptive, chaotic and sustained event.

There is however another previous episode when order broke down in the U.S. stock market that is a more relevant event for comparison, which was likewise prompted by another significant tax reform law. In this case, we need to go back in time another 11 years to the passage of the Tax Reform Act of 1986, which like the Tax Cuts and Jobs Act of 2017, prompted the stock market to tear sharply upward at the beginning of the calendar year, before having their supports cut out from under it sending stock prices crashing. We’ve tapped our archives for the following chart, which shows how that played out in what became known as the Black Monday Crash of 1987:

Here’s how we described what led to the 1987 stock market bubble and the Black Monday crash, in a post where we considered the question of tapped our archives, which the Federal Reserve’s outgoing chair Janet Yellen has chosen to make directly relevant to today’s stock market environment: