Stock market tumbles: still a rare phenomenon on the Paris market

Last year, the Paris market's flagship index, the CAC 40, saw some of its stocks post record price drops compared with the previous day's close. As part of its remit to supervise the financial markets, the AMF set out to gain a better understanding of the trends at work by examining the characteristics of this phenomenon and its possible causes.

A phenomenon that can be seen elsewhere in Europe and in the US

Its analysis of instances of significant upward and downward variation adjusted for market trends (i.e. variations, adjusted for changes in the index, of 10% or more compared to the previous day's close) highlights a higher frequency in 2023 of instances of significant downward variations: carried out for all CAC 40 stocks, the study identifies, for seven of these stocks, nine drops of 10% or more, as compared to three such variations in 2022 and six in 2021. By way of comparison, over the period 2013-2017, it observed only one to four similar instances per year. Furthermore, the analysis showed that the falls were of greater amplitude than previously.

This phenomenon, which is still rare, is not unique to the Paris market, and its increasing frequency can also be seen elsewhere in Europe and the United States.

For the seven stocks that experienced the biggest price tumbles, the AMF's analysis showed that they did not rebound to their pre-tumble levels in the weeks that followed. However, the liquidity of the stocks did not appear to deteriorate: trading volumes did not fall significantly in the following sessions, and the depth of the order book (number of stocks offered for purchase and sale) and the spread between the buy and sell prices offered remained stable.

High valuations and concentrated performance

Finally, the AMF examined the possible causes of this phenomenon. It began by studying the behaviour of the various market participants, including short sellers, asset managers and retail investors, but could not conclude that any one of these categories of participant was the main cause of the price tumbles observed.

It then looked at valuation levels and market performance. In 2023, the estimated per share price-earnings ratios in France, as in the United States, had returned to levels close to their historic highs. As a result, bad news, such as the publication of financial results deemed to be disappointing, may have been more heavily punished by the market. Moreover, in recent years, performance has been concentrated in a few leading stocks within the indices: investors seem to reward the stocks that are deemed to be high-performing more greatly and penalise those that disappoint more severely. In 2023, for example, 11 Stoxx Europe 600 index stocks alone accounted for 50% of the index's gains. In fact, this trend has resulted in a decorrelation of the stocks within the same index.