Goldman Sachs Group Inc.’s David Kostin has some good news, and some bad news.
First, the bad news. There’s a good chance the U.S. stock market will see a 10 percent drop sometime during the next 12 months. Well, as far as precision goes, “good chance” is not good enough for a quant like Kostin, so he gives an exact probability: 67 percent odds of a 10 percent retreat from a peak in the next 12 months.
Though quant work can be complicated, his rationale is actually quite simple — the market has gone way too long without a so-called correction, or a drop of at least 10 percent from a peak. The biggest declines from highs this year and last year were about 6 percent, and it’s been 22 months since the Standard & Poor’s 500 Index (SPX) saw a 10 percent drop. Mix in a little fancy math, and Kostin ends up with 67 percent odds we’ll see a correction in the next 12 months.
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