Sheer Panic

I wrote a post early in the month.  It was just after the selling that continues had begun. What I confess I thought would be a 5% consolidation of recent gains is approaching 10% and is, many hours when markets are open, full-blown panic.  Panic as in “GET ME OUT!!! NOW.  I’ll take whatever you offer.”

Needless to say, this is an extremely challenging environment. The speed, depth, and duration of the daily losses, paired with the volatility spikes, are things we haven’t seen since 2008.

The average stock in the S&P 500 is now down over 20% from its recent high, in many cases that is late September. Meanwhile, the S&P 500 Index has dropped 19 of the past 24 days and 13 of the past 15 — again, this is something that hasn’t happened since 2008.

Moreover, the pace of this downward dive has been nothing short of breathtaking. Even overlooking yesterday’s extreme moves (with the S&P 500 down 3.09%; the NASDAQ down 4.43%), last Wednesday & Thursday’s two-session 5.3% decline in the S&P was one of the largest drops seen in the past 50 years. And the RSI (Relative Strength Index) hit 17.6 — note it has only traded below 20 six times in the past 30 years.

That’s what is, my friends.  But why has this happened now? Especially at a time with  record low unemployment and record high GDP?  This is, to me at least, a mystery. Sure, interest rates are rising, but they’ve been rising for years now — slowly, steadily, and with great anticipation and foresight — there haven’t been any “surprise” hikes. Further, interest rates remain, unquestionably, near historically low. Some feel the market’s fall may be related to tariffs or tensions with China, but those realities have been going on for the better part of a year. Others contend that earnings are slowing. Perhaps, but earnings are estimated to grow by more than 10% in 2019, and more than 10% in 2020, meaning the current market multiple stocks carry will easily be “grown into.” I also hear that the market’s forward P/E is too high – predictions on stock valuations next year. But P/E’s are about the lowest they’ve been in the past four years, and already down about 18% from December 2017 highs. Even before this month’s market falls, those valuations were sitting right on their 5-year average

In searching for an explanation for the recent drawdown, still others point to technical factors – risk parity funds, negative flows on passive ETFs, a lack of buybacks, etc. It’s hard to pinpoint what the cause is. The more relevant question is likely: where do we go from here?

With that in mind, but with no sense of the time these things will take to play out, four things remain true, and may offer a glimpse of what’s to come:

1) As we are still toward the beginning of earnings season, we are in the midst of a stock buyback blackout period. Meaningful buybacks will kick-in within days (beginning 48 hours after they report, companies may repurchase up to 25% of the Average Daily Volume) as the bulk of companies report this week. This should help lift stock prices soon.

2) Midterms will be upon us and soon behind us. This tends to be a very favorable time for the markets. In fact, over the past 80 years, according to Deutsche Bank, the three-month period running from a month ahead to two months after the election has produced a median +8% gain. And that includes only one decline, a -4% drop in 1978, over that period in the last 21 midterm years. So, 20 out of 21 being positive is pretty good.

3) Seasonality: Over the past 30 years (results are similar over 20- and 10-years, too), the fourth quarter of the calendar year is by far the best quarter for the S&P 500, producing an average +4.76% gain

4) Dips and Corrections are temporary:

a) The SPX has dropped by -4% or more in one day on 41 occasions over the past 59 years (going back to 1959 — the first full year of data). We’ve seen more than 10 days this year, so far, with drops between -2.1% and -4.1%.
b) Over the next month, the S&P was relatively flat (up an average of about one-half of a percent), but over the next year the index was up an average of +20.1%. Breaking down the latter figure, the S&P was up 78% of the time over the next year, including up by double digits 75% of the time with a range of +12% to +67%.
c) Finally, there have been 15 drawdowns of -5% or more since the end of the financial crisis. Every single drawdown (15 out of 15) has seen a recovery. In other words, every single dip should have been bought. Despite these persistent drawdowns, the market moved higher by +412%, in just over 8 years:

Over the past 30 years, alone, the S&P 500 Total Return Index is up +1,731% — recessions, corrections, and drawdowns included.  Every dip has been bought. And without knowing exactly when the drawdown will begin or end, there has never been a reliably good time to be out of the market. It has paid to stay invested.

Is what’s happening upsetting? You betcha.  But it will pass. Patience, dear people. Patience.  If one hopes to get the benefits of investing in stocks, you must be able to take the occasional drawdowns.  It’s like growing roses: you must endure being stuck by thorns.

I am in Romania right now, speaking at several locations.  Many of the statistics I have sited in this post have charts accompanying them. Unfortunately, your trusted blog writer is incapable of figuring out how to post the charts, so you’ll have to do without them.

This too shall pass.  God bless us all.

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