Stock Market Volatility – Bear Market?

Bear market?

The depth and speed at which the stock market (basis S&P500) has fallen in the last few days has many wondering if we are headed into a Bear market for stocks.  Generally, bear markets are defined as a decline of 20% from the previous high.

It’s worth putting the recent decline into perspective:

  1. The S&P 500 Index had risen 55% from Feb 8, 2016 to the all-time high on 1/26/18 closing of 2872.87 (source: Yahoo Finance)
  2. The S&P 500 had risen 7.5% in 2018 through 1/26/18.  The current pullback is 7.8%, essentially only giving back the year-to-date gains.
  3. We have seen an extended period of limited volatility in stocks.  Through 1/26/18 the market had gone over 340 days without even a 3% pullback from the previous high, the longest period ever.  Normally, the stock market experiences a 5% pullback 3 times per year, on average.
  4. The fact is that while these sharp sell-offs may seem to be more pronounced and scary in our modern world  of 24/7 media coverage and Apps, they’re actually not as rare as you might think. To this point, Ben Casselman of Fivethirtyeight.com did a fantastic job of summarizing recent events: “Set aside the psychological importance of the New Year and what we’re really talking about is a market that lost approximately 8 percent in 7 trading days (as of the end of 2/5/2018). That’s hardly unprecedented. We had equally bad 7-day stretches in 1950, 1955, 1957, 1962, 1966, 1970, 1973, 1974, 1978, 1979, 1981, 1987,1997, 1998, 2000, 2001, 2002, 2008, 2009, 2011 and 2015. That list includes some brutal recessions and memorable crashes, but also several incidents that proved little more than blips.”
  5. 10% declines, generally the level considered a “correction”, occur almost every year as the chart below shows.  We haven’t experienced one since Jan 2016, so we were overdue.

market_chart_market_volatility_post

When the financial markets hit periods of extreme volatility like this it is hard to predict when it will stop.  What we do know is:

  • The selling will exhaust itself but we can expect to hit lows, bounce from there, retest those lows, and eventually build a base (bottom) on which stock can start to rise again
  • The fundamentals of the equity market have not changed since last week
    • We are seeing the best Corporate sales reports since 2006
    • We are seeing the best Corporate earnings in 6 years
  • Economic fundamentals remain solid, with expanding global growth, improving personal incomes

So, bottom line, we see no signs of a bear market or significant slow down in economic growth.  However, while the fundamental picture remains positive, the technical picture in the equity markets has turned decidedly negative.  At the moment, the stock market is massively oversold but market participants are not responding to this.  The key levels I am watching are 2,575 on the S&P500, and 23,263 on the Dow Jones Industrial Average, which are the 150 day moving averages.  If these levels are breached then I will be implementing additional risk management steps across your portfolio.

I hope this eases some of your concerns.  Feel free to call me if you want to discuss further.

 

 

Sources: Macro Analytics for Professionals, Yahoo Finance.com, Seeking Alpha.com

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