For the first time in two years, the S&P 500 fell officially into correction territory on Thursday, down more than 10% from its record reached on January 26th, 2018….here’s what usually happens next…it depends!
Is this a Bull market correction and the trend is still up? Or is this the start of a Bear market and the markets are trending down?
- “The average bull market ‘correction’ is 13% over four months and takes just four months to recover,” Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer said in a Jan. 29 report. We have had eight Bull market corrections over the past 20 years.
- But the pain lasts for 22 months on average if the S&P falls at least 20% from its record high, (below 2,298 on the S&P 500…2535 as I write) into bear market territory, the report said. The average decline is 30% for bear markets. We have had two dramatic Bear markets in the last 20 years. The “Tech Bubble” starting in March of 2000 that lasted 31 months and took 56 months to recover. The second, the “Housing Bubble” that started in October of 2007, lasted 17 months and took 49 months to recover. Source: Evelyn Cheng | CNBC
“Corrections scare the snot out of people. For many, who thought markets only go up, they feel like the end of the world. This is especially true when pundits start trying to explain the drop in stock prices by arguing that there are fundamental problems with the economy. This time is no different. But, in our opinion, this is an emotional correction, not a fundamental one. The US is not entering a recession, and we believe higher interest rates over the next few years do not spell doom for the economy or markets”, said Brian Wesbury, Chief economist of First Trust. (Bold print and underlining added).
Mr. Wesbury continues…If we focus on the four pillars of Economics: Monetary Policy, Tax Policy, Trade Policy, and Spending & Regulation, we see the following:
- Monetary Policy – The Fed is still easy and will be for the foreseeable future. Remember, there are still over $2 trillion in excess reserves!
- Tax Policy – Tax policy has improveddramatically on the margin, a tailwind for growth and earnings.
- Trade Policy – Total trade (exports + imports) sits at record highs.
- Spending & Regulation – This is a mixed, but still positive, bag. On the regulation front, 2017 saw the biggest decline in regulation, at least since the Reagan-era, and possibly in history. That’s great news for growth. The spending side is still a concern. The recent budget deal reached in the U.S. Senate boosts spending at least as fast as GDP growth over the next couple of years. That’s not a recipe for long-term economic acceleration, but also not an immediate threat to growth.
The bottom line shows that the fundamentals of the economy are strengthening. Higher interest rates are a byproduct of a stronger economy. And, out of the four potential threats to the economy, only one is moderately negative.
As Mr. Wesbury said; “It’s not often you get a substantial pullback in the market when both economic and earnings growth are strengthening. Stay calm. Stay invested… Don’t fight the fundamentals.”
After all the above commentary, we think this is a Bull Market Correction not the start of a cyclical Bear Market.
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