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Some Much Needed Perspective

Investment

A strong punch to the gut. With the stock market's behavior this week, I can certainly understand it if you are feeling as if the market has delivered a strong punch to your gut. This past week has been one of the toughest weeks for U.S. stocks so far this year. Through Thursday, the S&P 500 Index has lost a little over 3% this week. Thursday's decline was the S&P 500's worst one day drop since February 3, 2014. Not to be left out, the Dow Jones Industrial Average (DJIA) fell 358 points on Thursday. So far this year, there have only been two days (prior to Thursday) that the DJIA has closed down more than 300 points. Days like Thursday have certainly not been a common occurrence in 2015! As a matter of fact, it wasn't a common occurrence last year either. In 2014, there were only five days where the DJIA closed down more than 300 points.

So what's behind the increased stock market volatility of late? There is no shortage of opinions when it comes to assigning the blame for what has caused this latest market drop. Some would have you believe that it is the slowing down of China's huge economy, along with their decision to devalue their currency - the yuan. Still others say that it is the uncertainty about whether or not the Federal Reserve will raise its benchmark interest rate next month. The Fed has not raised interest rates from their current historically low levels in almost ten years. Continued uncertainty surrounding Greece also bears some blame. Who knows? The markets are complex entities that react to many variables - and usually react to things that we are not even aware of yet. As human beings, we constantly feel the need to understand the world around us. We are eager to learn what is causing things to happen. While the answers that are proffered may make us feel better, they may or may not be the true cause. Only time will tell....maybe.

To put things in a little better perspective, let's back up and take a longer look. So far in 2015, the S&P 500 is down only 1.13%. From it's May peak, the S&P 500 is down a little more than 4%. Historically, a 4% pullback in the market is not uncommon. Another important observation is that the S&P 500 has not had a 5% pullback yet this year, let alone a 10% draw down. Going back to 1928 and looking at daily closing prices for the S&P 500, the stock market has pulled back 10% 93 times over that 86 year span. In other words, on average the market has pulled back by 10% once per year. The last time the S&P 500 had a 10% pullback was back in 2011 when it fell a little more than 19% from April 29th to October 3rd. We have not seen a 10% stock market decline in almost four years! Maybe this is why this recent market pullback has felt a bit worse than the numbers might suggest.

By historical averages, the market is certainly "due" for a 10% correction. However, that is not a guarantee. There is a precedent for the stock market to go for prolonged periods of time without a 10% correction. For example, from the stock market bottom in March 2003, it took until November 2007 for another 10% correction. That was 4 1/2 years. And that was during a structural bear market. Since we are currently in a structural bull market, let's take a look back to the last structural bull market from the early 1980 through the end of 1999. During that period, the S&P 500 went over seven years between 10% pull backs; from August 1990 to October 1997.

While we have not had a 5% correction yet this year, I wanted to provide you with some statistics on recent 5% stock market pullbacks in order to give this latest market action some added perspective.

  • Since the stock market bottom in 2009 there have been 20 pullbacks of at least 5%.
  • On average, there is an additional pullback of 2.12% after achieving the loss of 5%.
  • On average, during the 2009-present rally, it has taken 7 days after reaching 5% down before the actual low point was reached.
  • While the average is 7 days from hitting the 5% pullback mark to finding a stock market bottom, the longest stretch was 24 days (November 2011) and the shortest was zero days on multiple occasions.

While looking at the past data is a nice way to help us understand what we are currently experiencing, it is not a prudent way to manage your portfolio. You know that I am fond of saying, "What is, is." And currently "what is" is that US Stocks continue to be ranked as the number one asset class out of the six asset classes that I evaluate on a daily basis. As a matter of fact, U.S. stocks have been ranked number one for almost four years straight! Bonds are currently ranked second. If U.S. stocks begin to deteriorate relative to the other asset classes, I will react appropriately. It is important to tune out the short-term market noise and listen to what the indicators are saying instead. I know that it is hard to do. But my indicators have guided us safely in the past; and they will guide us safely in the future. You can rest assured that these indicators will tell me when it is no longer prudent to be bullish on the U.S. stock market. Please remember that positioning your investments toward current trends, rather than past or future presumptions, serves as the driving force behind the methodology for managing client portfolios at Tapparo Capital Management.