What Does a Bottom Look Like?
Sean Dillon CMT, CFTe®, Vice President of Investment Strategy | January 27, 2022
From January 4th, the S&P 500 has fallen close to 10%. A monthly decline of this magnitude has occurred 15 times in the last 50 years; and of those 15 times, 11 have occurred during recessions. We are not in a recession and our proprietary recession model currently forecasts a 4.3% probability of recession in the next 18 months (that is extremely low). Therefore, we don’t think this is the start of the next major bear market.
With that in mind, we have been monitoring a plethora of technical indicators to help us assess where we are in the correction process. We can compare current technical conditions to the conditions that were present at the bottom of non-recessionary corrections of 10% since 2010. The table below shows just a few of these indicators.
Source: Stockcharts.com and Ned Davis Research as of 1/26/2022
From a rate of change perspective, we are currently experiencing a quicker but less advanced decline in terms of time. Breadth has significantly deteriorated although more breadth deterioration is possible before we reach a bottom. However, sentiment is very pessimistic, and investors are pricing in a large degree of volatility. Could equities continue to decline from here? Of course, they can. Midterm election years tend to remain very choppy for the first half of the year. But as we see it, we are in the final innings of this correction.
What Comes After a Big Year For Stocks
Richard Barrett, Chief Investment Officer | January 13, 2022
The questions I am getting from clients now are focused almost entirely on three specific things: (1) the equity market is at an all-time high and coming off a big year for returns…..danger territory?; (2) inflation running hot and inflationary pressures everywhere, and (3) is the Fed about to abruptly end the economic recovery? All excellent questions – lets tackle #1 today.
Over the past 40 years, the US equity market has delivered +20% oversized returns 11x. In 9x out of these 11x the following year the market had positive returns. The average of the following years return was +13% – please see the nice chart below. Negative returning years were 1981 and 1990. In 1981 (following a solid 1980), the Fed’s battle versus extremely high interest rates had just commenced. In 1990 (following a solid 1989), the yield curve had inverted and a regional recession (NE, TX, AZ real estate) was underway. We don’t cherry pick data, though. But 9 out of 11 is a pretty good batting average following big up years for the market. Data is data.
It’s also interesting to note that early in the following year, the market retreated each time. Sometimes small declines, sometimes large declines…..but fell 11 out of 11 times. Expect volatility to surface in 2022. Last week was not the first time we will hit speed bumps this year in the equity market. Expect volatility, embrace volatility, do not fear the volatility when it surfaces.
Mid-term election years are “bumpy”
Richard Barrett, Chief Investment Officer | January 6, 2022
“In the short run, the stock market is a voting machine; in the long run, the stock market is a weighing machine”
– Benjamin Graham (the father of value investing)
The blue line, green line, purple line, and red line below all say that midterm election years get more and more bumpy the closer we get to casting our collective votes. Everyone should be expecting market volatility so carry an umbrella and buckle up safe. It’s noise and actually means very little over the long term but does sell a lot of TV ads and those folks need to make a living too so here we go. Enjoy the show.
Stuff I find myself looking at while I patiently await what should be AWESOME 4Q21 corporate earnings. Those announcements can’t get here fast enough.
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