Panic? or Panic!

Chris Kline

13 minutes ago

3 min read

1.) PANIC - Yesterday's market action certainly carried with it elements of panic. But, as an individual investor, should you? No, that's not wise in investing, or for that matter, anything in life. Panic leads to poor decisions. In times like this, we have to use history as a guide to shed some perspective on what might be next. While no one knows for absolute certainty how this will play out, I can guarantee you one thing. During every major market drawdown, people said the same thing: “This time is different! You just don’t understand!” And yet every single time, a year later, the market was trading at much higher prices. This isn't a time to be worried or panic. I'm confident that our systems will prove helpful. Even though yesterday the S&P 500 was down -4.36% and the Nasdaq was down -5.52%, our two fully diversified models were off just -2.79% and -1.33%. Of course, our most aggressive model was down more...but that isn't historically abnormal either. That model tends to recover the quickest since it is exposed to the higher degree of volatility. Remember, volatility works both ways...up and down. In terms of history, here's a look at declines and recoveries for the S&P 500 for every midterm election year

Not a time to panic.

Table titled S&P 500 Midterm Election Year Declines & Recoveries, showing years, max drawdowns, and 1-year forward returns in blue and white.

2.) VOLATILITY - Let's dig a little deeper into market panic through the lens of VIX - the S&P 500 volatility indicator. Below is a chart that shows the top 20 instances of the largest one-day percentage rise for the VIX. Times when volatility exploded. Yesterday came in at number 3 with a 70% one day rise. That's a lot and is only behind instances in 2018 and 2024. Of course, those two years occurred during both a mid-term election and a Presidential election. But look through the history of those two instances' returns, and you can see returns were higher one year later for both. Short term (1 month), the worst instance for returns following a strong VIX spike occurred during the covid crash of 2020. So, I think we can throw that data point out since we're not in a pandemic style panic. For the next worst instance, we have to go all the way back to 1990. Back then the catalyst for the spike was driven by poor earnings results, growth slowdown fears, inflation risks, budget deficits and the fairly new advent of program trading. Hmmm...the more things change, the more they stay the same, hey? This is also why history tends to be helpful. The worst one year forward return (-12%) for the S&P 500 was from 11/26/2021 to 11/26/2022, which was in the midst of a difficult bear market. Ok, but let's also look at how our models back-test during that rough patch:

Tiger: +6.3% (more moderate style, diversified model). The worst drawdown for this model during this timeframe was -4.01%.
Great White: +37.03% (aggressive model). The worst drawdown for this model during this timeframe was -18.57%.
Grey Wolf: -3.88% (diversified, tax sensitive model). The worst drawdown for this model during this timeframe was -5.04%.

Now, did these models have to contend with volatility...both up and down? Yes! But compared to the major market, these back-tested return profiles are pretty decent.

Again, not a time to panic.

Table of VIX spike dates and forward S&P 500 returns, with green/red heatmap and highlighted 11/5/2026 row.

3.) NEXT - Ok, so what might be next? I'm sure that is the main question on everyone's mind. While I think I've answered that question with the two points above, here's a look at how markets did from 1 week to 1 year after the S&P 500 suffered a -4% single day loss like yesterday.

Again...not a time to panic.

Bar chart of S&P 500 returns after 4% drawdowns, showing blue and green bars rising to 25% and 40.1% at 12 months.