Whenever we get into a market correction that includes a couple days of significant market declines like last Wednesday and Thursday (Oct. 10 & 11, 2018), it can be worrying. This is especially true when recent stock darlings like Apple, Amazon and Netflix lead the way down and even “safe” assets like U.S. Treasuries lose value as well. Human nature dictates that we need to know why something is happening so we flip over to Fox Business and CNBC. As usual, they are never at a loss to give us a number of reasons to be worried. This time the theories include potentially rising inflation, the Fed raising rates too fast and so choking off growth, trade disputes with China getting worse, and markets overvalued.
Regardless of the reasons, does the recent turbulence mean the bull market is coming to an end?
The Last Time it Was This Bad – February
For most of us, if something isn’t emotionally traumatic, we usually don’t remember it for long. For example, the market drop last Wednesday, when the Dow lost 832 points, was only the 3rd worst this year (Source: Wikipedia). Remember when the Dow fell over 1,000 points twice in the same week back in early February? Neither do I. Was it because we didn’t have any nervous feelings at the time? I would guess our collective amnesia probably has more to do with how the markets have performed since then as opposed to any lack of discomfort we felt during that period. Ultimately the markets dropped around 10%, but that loss was erased by the the positive performance of the past 2 quarters.
Another contributing factor to the current bout of jitters could also be that, prior to last week’s jolt, the market had been historically calm. Up to that point, we had gone 74 days without experiencing a move of 1% up or down, the 10th longest stretch in history (Source: LPL Research).
Market Drops are Normal
As I shared in a previous post, the stock market sees drops of 5%-10% an average of 3 times per year. Only a small fraction of those pullbacks turn into bear markets, defined as a loss of 20% or more. So far during this latest bout of turbulence, the major market indexes, Dow, S&P 500 and Nasdaq, are off anywhere between 7% – 10%. However, even though market drops happen with regularity, most people never fully get used to them. Those emotions are normal as well.
Probably Another Minor Correction
Predicting markets is a fool’s game. That said, this has the makings of a garden variety correction instead of the start of the next bear market.
There are a couple reasons for this. First, the odds that any market pullback of 5%-10% winds up being the beginning of the next 20%+ drop is 1 in 19. (Source: Yardeni Research) Adding to that, history tells us that when U.S. stocks are a leading asset class, as is the case currently, pullbacks usually aren’t severe or long lasting. (Source: Dorsey Wright).
Since stocks have been recently performing better than other investment alternatives such as bonds, international stocks, commodities and savings accounts, chances are this current market turbulence will likely be as memorable as February’s was. That is to say, not very.