The rollercoaster ride is on the move again. While it may feel new and frightening, the reality is that the recent declines in the stock market are not extraordinary or new. In fact, we experienced almost the exact same pattern in late January into early February 2018.
- Earlier this year, the S&P 500 hit an all-time high on 1/26/18, only to tumble 11.9% through 2/5/18. This time, the S&P 500 hit a new all-time high on 9/20/18 only to tumble 7.5% through 10/11/18.
- While the February 2018 downturn was a “correction”, which is generally defined as a 10% decline from a previous high, the current decline has not reached that level. While concerning, corrections occur once a year, on average. We hadn’t seen a correction in over two years (2016-2017). Corrections also tend to be short and shallow. “The average bull market ‘correction’ is 13 percent over four months and takes just four months to recover,” Goldman Sachs.
From a technical perspective this week’s activity has a normal pattern during a correction (and again almost a mirror image of February 2018). There is usually a selling climax (swift and sizeable decline), followed by a throwback rally that doesn’t hold, leading to a retest of the previous low.
That is exactly how this pullback has played out. Two weeks ago, the S&P 500 declined 152 points (5.28%) between 10/9– 10/11 in swift and massive selling. It then rallied 38 points (1.42%) by the end of that week. Last week, the S&P again bounced back 59 points (2.15%) on Tuesday 10/16. Yesterday and today, we have more selling and a decline of 76 points (2.5%) as of 10:19am EST 10/23/18, to almost exactly the intra-day low on 10/11. If the pattern holds, the market will waffle between gains and losses for a period of time in a bottoming process. As long as the recent intra-day lows (2,710 on S&P500) hold I anticipate we have seen the worst of this correction.
We do not think this is the beginning of meaningful and sustained weakness for markets, as fundamentals remain supportive (economic growth and corporate profitability are improving). However, volatility is back and likely here to stay. We continue to focus on balancing the risk and return potential in your portfolio and will make any appropriate adjustments as conditions evolve.
As always, we appreciate your confidence in us. Please call us if you wish to discuss further.
Sources: Raymond James & Assoc., Goldman Sachs, CNBC.com, Yahoo Finance
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