What if there was a "flash crash" occurred and nobody paid any attention?
That took place -- yesterday.
During the original "flash crash" of May 6, 2010, the Dow Jones Industrial Average (^DJI -0.98%) fell 600 points in the space of five minutes, before recovering most of the loss over the twenty minutes that followed. Nearly a trillion dollars in market value was temporarily wiped out.
By my estimate, the S&P 500 (^GSPC -0.46%) lost roughly the same amount in market value within the first five minutes of yesterday's trading session and recovered 40% of the loss over the next five minutes.
But while the "flash crash" sent shock waves from Wall Street to Main Street and on to Washington, D.C., I found virtually no coverage of yesterday's events. My guess is that, unless you're a market professional or a financial journalist, you didn't hear about it.
If you think I'm exaggerating, take a look at the following table, which shows the three stocks in the S&P 500 that suffered the greatest intraday declines yesterday:
|
|
1-Day Return, Aug. 24 |
Maximum Intraday Loss, Aug. 24 |
|---|---|---|
|
XL Group |
(3.6%) |
(85.8%) |
|
HCA Holdings |
(2.2%) |
(49.1%) |
|
Medtronic |
(4.5%) |
(25.2%) |
Source: Author's calculations, based on data from YCharts.
Those figures are accurate: The price of XL Group's shares collapsed by nearly nine-tenths within the first 10 minutes of the trading day. These aren't penny stocks we're talking about! HCA Holdings has a market capitalization of roughly $35 billion with an average of 2.7 million shares changing hands on a daily basis. Medtronic's market value exceeds $100 billion.
And the phenomenon was not contained to a small set of stocks. The median "downward spike" for stocks in the S&P 500 was 7.7%. In other words, half the stocks in the index suffered an intraday loss exceeding 7.7%. Not surprisingly, nearly 40% of the stocks in the S&P 500 managed to set a new 52-week low during the session.
The largest blue chips and the most visible names were not spared:
|
|
1-Day Return, Aug. 24 |
Maximum Intraday Loss, Aug. 24 |
|---|---|---|
|
JPMorgan Chase |
(5.3%) |
(21.3%) |
|
General Electric |
(2.9%) |
(21.2%) |
|
Home Depot |
(3.1%) |
(20.7%) |
|
Verizon Communications |
(3%) |
(17.4%) |
|
|
(4.6%) |
(16.3%) |
|
S&P 500 |
(3.9%) |
(5.3%) |
Source: Author's calculations, based on data from YCharts.
These spikes produced some eye-popping, albeit fleeting, paper losses in market value:
|
|
Loss in Market Value Based on the Intraday Low, Aug. 24 |
|---|---|
|
JPMorgan Chase |
($78.5 billion) |
|
General Electric |
($52.7 billion) |
|
Home Depot |
($50.0 billion) |
|
Verizon Communications |
($39.6 billion) |
|
|
($34.9 billion) |
|
Total, S&P 500 stocks |
($2.0 trillion) |
Source: Author's calculations, based on data from YCharts.
In 2012, I wrote that "flash crashes will become increasingly frequent; at the very least, the events of May 2010 are not a one-off." I still believe that.
Does it matter that a flash crash happened without your knowledge? Not as much as you might think. It's much better for long-term investors not to experience -- let alone react to -- that sort of volatility. While yesterday's losses in market value were, in many cases, substantial, they lasted for the blink of an eye. More importantly, the value of the underlying businesses is not impaired by a technical market event.
For a longer discussion on how long-term investors should think about these market phenomena, check out my Best Practices for a Long-Term Investor in a Microsecond Market.
