Volmageddon, Brexit, and the Christmas Eve Massacre

This episode is unlike any other in the series. Every previous installment chronicled clusters of crash days — eight in two months, thirteen in five months, four in two weeks. This one covers eight full years and contains a single qualifying day.

The gap between the last −4% day of Episode 7 (August 18, 2011) and the one in this episode (February 5, 2018) spans 2,362 trading days — nearly six and a half years. It was the longest stretch without a −4% decline since the S&P 500 went from June 1962 to September 1986 — a 24-year gap. The bull market that began in March 2009 was not just powerful. It was historically, extraordinarily calm.

But calm is not the same as uneventful. Three episodes of extreme stress — each falling just short of the −4% threshold — reveal how close markets came to breaking during the quiet years.

August 24, 2015 — down 3.94%. Just six basis points from our threshold. The Shanghai Composite Index had crashed 8.5% overnight — its worst day since 2007 — as China’s stock market bubble, which had been inflated by margin lending and government cheerleading, finally burst. The contagion spread instantly to global markets.

The S&P 500 fell from 1,970.89 to 1,893.21. But the intraday action was far more dramatic: the index plunged as much as 5.3% in the opening minutes as circuit breakers triggered and market makers pulled bids. Hundreds of ETFs traded at deep discounts to their net asset values. The dysfunction lasted only minutes, but it exposed how fragile the market’s plumbing had become in the age of algorithmic trading.

Of 4,452 stocks tracked, 3,945 declined (88.6%), with a median return of −3.62%. Mining and commodity stocks were hit hardest: Kinross Gold fell 12.30%, Freeport-McMoRan fell 9.48%, Vale fell 8.82%. The market recovered within a week, but the flash crash left regulators deeply unsettled.

June 24, 2016 — down 3.59%. The United Kingdom voted to leave the European Union in a referendum that virtually no one — including the campaign’s own leaders — expected to succeed. The S&P 500 had rallied 1.34% the day before, pricing in a “Remain” victory. When the results came in overnight, futures plunged.

The S&P fell from 2,113.32 to 2,037.41. Of 4,631 stocks tracked, 3,690 declined (79.7%), with a median return of −3.13%. The reaction was sharp but remarkably short-lived: the market recovered its losses within three trading days and was at a new all-time high within a month. Brexit was a political earthquake that turned out to be a market tremor.

February 5, 2018 — down 4.10%. The S&P 500 fell from 2,762.13 to 2,648.94 in a session that became known as “Volmageddon” — a portmanteau of “volatility” and “Armageddon.”

The proximate cause was a strong jobs report released on February 2, which showed wages growing at 2.9% — the fastest pace in eight years. Paradoxically, good economic news was bad for stocks: rising wages implied rising inflation, which implied rising interest rates, which implied falling bond prices and higher discount rates for equities. The S&P had already fallen 2.12% on Friday; Monday’s selloff was the crescendo.

But the deeper story was about what happened after the close. The VIX — the market’s “fear gauge” — spiked from 17 to 37 in a single session. This annihilated a popular class of exchange-traded products that were short volatility: bets that the VIX would remain low. The XIV, an inverse VIX ETN with $1.9 billion in assets, lost 96% of its value overnight and was liquidated. The SVXY, a similar product, fell 90%. Billions of dollars evaporated in hours.

Of 5,139 stocks tracked, 4,416 declined (85.9%), with a median return of −3.13%. Wells Fargo fell 9.22%. NVIDIA fell 8.49%. AMD fell 7.07%. The destruction was broad-based, but the real carnage was in the volatility products that retail investors had been using to harvest “easy” income from selling fear.

The market recovered from Volmageddon within weeks and reached a new all-time high of 2,930.75 on September 20, 2018. Then it fell apart.

The fourth quarter of 2018 was the worst since Q4 2008. The S&P 500 fell 19.78% from its September peak to its Christmas Eve low of 2,351.10 — brushing against the 20% threshold that defines a bear market. The catalysts were multiple and reinforcing: the U.S.-China trade war was escalating, the Fed was raising interest rates (four hikes in 2018), and corporate earnings growth was decelerating.

Two days came close to our threshold: October 10 at −3.29% and October 24 at −3.09%, followed by December 4 at −3.24%. None breached −4%, but the cumulative damage was severe. The index fell in 11 of December’s 19 trading sessions, including seven consecutive declines from December 13 to 21.

Then came December 24, 2018 — Christmas Eve. Treasury Secretary Steven Mnuchin made an extraordinary call to the CEOs of the six largest U.S. banks, ostensibly to confirm that they had “ample liquidity.” The gesture, intended to reassure, had the opposite effect: investors wondered why the Treasury Secretary was calling bank CEOs on a holiday unless something was seriously wrong. The S&P fell 2.71% in a half-day trading session, touching 2,351.10 — its lowest level in twenty months.

Two days later, on December 26, the S&P surged 4.96% — its best day since March 2009. The selloff was over. By April 2019, the index had recovered everything. The Christmas Eve Massacre, like so many episodes in this series, rewarded those who held and punished those who fled.