It is a pattern investors know too well: when markets fall, they fall together. But when
they rise, not everyone joins the rally.
A recent analysis of six decades of U.S. market data explores this pattern by looking at
what happens when the market takes an extreme turn. The research investigates how
likely different industries are to follow when the market crashes or soars.
The answer reveals a story of asymmetry, surprise, and collective emotion that runs
deeper than numbers.
Crashes Speak Louder Than Booms
The findings show that industries are far more connected to the market during
downturns than during good times. When panic hits, industries crash together, but when
optimism prevails, each moves at its own rhythm.
The probability of an industry crash when the market crashes is at least seven times
higher than the probability of an industry jump when the market booms. Across all five
industries studied – Consumer, Manufacturing, HiTec, Healthcare, and Others (including
finance and services) – the connection to the market was much stronger in bad times.
High-tech and service-related industries showed the strongest reaction, with crash
probabilities exceeding 90 percent. Meanwhile, consumer and healthcare sectors were
slightly more resilient but still showed significant vulnerability when fear gripped the
market.
The message is clear: markets fall together faster than they rise together.
The Surprising Truth About Good Times
Perhaps the most unexpected finding is that crashes can be more severe in non-
recession periods than during recessions.
In good times, investors simply do not expect it. The study refers to this as the surprise
effect. When markets are booming and confidence is high, a sudden downturn triggers
panic. Investors rush to sell, liquidity dries up, and what begins as a correction turns into
a contagious shock.
In contrast, during recessions, everyone already expects the worst, so crashes, while
painful, are less surprising and slightly less contagious.
This finding challenges a common assumption that crises hit hardest in bad times. In
reality, stability can breed complacency, and complacency can amplify the shock when
the storm finally comes.
The Hidden Web of Contagion
Behind these market dynamics lies a deeper pattern known as financial contagion,
when fear and liquidity pressure spread rapidly across sectors.
During crashes, investors scramble to secure cash, institutions engage in fire sales, and
liquidity risk spreads from one industry to another. The data shows that this effect
intensifies the more unexpected the crash is.
This interconnected behavior, especially in non-recession periods, explains why
seemingly unrelated industries such as healthcare and tech can suddenly move in
lockstep when markets fall.
A Market That Thinks Together
The research highlights a crucial lesson for both investors and policymakers. Average
correlations do not tell the full story. Traditional models often underestimate risk
because they focus on typical days, not extreme ones.
By examining how industries behave in the tails, during crashes and surges, the study
paints a more realistic picture of market vulnerability. The results reveal a market that
behaves rationally most of the time, but emotionally and collectively when it matters
most.
When Calm Is Not Safe
In the end, the findings remind us that calm markets can be deceiving. They may not be
a sign of safety but a silence before the storm. Because in finance, as in life, we tend to
move together not when we rise, but when we fall.
This article was inspired by the research “Market Extreme Moves and the Industries'
Probability of Crash and Jump” by Mohammed Bouaddi, Department of Economics, The
American University in Cairo, published in the Archives of Business Research (2024).
