CORRECTIONS CAN BE PAINFUL
The distinction between corrections (10% drawdown) and bear markets (20% drawdown) is somewhat arbitrary. Let’s assume we knew with 100% certainty the current sharp pullback was a correction. Does that mean the pain is almost over in 2018 or could there reasonably be more downside?
We studied the nine historical cases highlighted in an October 26, 2018 Wall Street Journal article entitled “Has The Bear Market Arrived? History Says Not”. From the @WSJ article:
“The S&P 500 is down 9.1% over the past month, and the broader MSCI All Country World has lost 8.5%. There is no clear explanation: Investors have blamed tighter monetary policy, trade tensions and weakening economic indicators outside of the U.S., but these factors have been present all year. “
“An analysis by U.S. investment bank Morgan Stanley , surveying the past 65 years of the S&P 500 and the past 27 years of the MSCI All Country World, finds that sharp initial drops are hallmarks of run-of-the-mill corrections, defined by declines of between 10% and 20% in equity prices.”
You can make an argument the @WSJ image below and the fact the article refers to most of the similar historical cases as “run of the mill corrections” implies the pain in 2018 might be over very soon.
We reviewed all nine historical cases above; the results are shown in the table below.
The S&P 500’s recent intraday all-time high was printed on September 21, 2018 at 2940.91. Therefore, if the 2018 market experienced the average decline above, the S&P 500 would hypothetically find a low on January 4, 2019 at a level of 2382. The S&P 500 closed Monday at 2641, or 259 points above the hypothetical average bottom of 2382. Said another way, if the market experienced the average high to low decline in the nine similar historical cases above, the S&P 500 would fall an additional 9.78% from Monday’s close.
HOW DOES ALL THIS HELP US?
The table above will not impact our process in any way. The range of declines in the nine historical cases of -10.59% to -37.27% helps us keep an open mind about a wide range of outcomes from “we could be near a bottom” to “this could still get really ugly.”