By: Richard A. Anderson
From its close on September 20th to its close on December 24th, the S&P 500 Index declined 19.8%, including a greater than 7% one-week (December 14-21) fall that had not been seen since the Global Financial Crisis of 2008-09. The generally accepted technical definition of a bear market is a decline of 20% or more. While the S&P 500 barely avoided the official bear market designation, it sure felt like one.
Coming off the worst week since the Global Financial Crisis, the S&P 500 has responded by posting back-to-back weekly advances. But even these positive weeks have been filled with their share of ups and downs.
The New Year started off with two consecutive days of losses greater than 1%, the first time this has happened since 2016 and only the 16th time this has occurred in the history of the S&P 500. With a cumulative loss of 2.35% in the first two days of the year, this represents the worst start to a year since 2000 and the fifth worst ever.
There is a silver lining, though. In the five prior years where the S&P 500 has declined by 2% or more in the first two days of the year, there has been a quick recovery and strong gains ahead. The table below shows day three, the next week, the remaining month, and the remaining year all have been positive on average.
The third trading day of this year was Friday. The S&P 500 jumped 3.4% on Friday due in part to a better than expected jobs report, market-friendly comments from Federal Reserve Chair Jerome Powell, and an announcement from China’s central bank that it will reduce its reserve requirement in an effort to boost the country’s slowing economy.
What we have been experiencing over the last few weeks is symptomatic of two things. First, markets are historically more volatile when below the 200-day moving average. This volatility includes moves to both the upside and downside. The S&P 500 is currently below its 200-day moving average.
Secondly, stocks are considered a leading economic indicator. As previously mentioned, we barely avoided the dreaded bear market label. Yet, we are nine and a half years into an economic expansion. The second longest economic expansion ever. Thus, investors are anxious, looking for any sign that this expansion may continue or falter. And that means equating stock market declines with economic recessions.
Since World War II, there have been 14 periods where the S&P 500 has declined by 19% or greater (not officially bear markets, but close enough). 7 of those declines have been accompanied by an economic recession and 7 have not. The point is that bear markets can occur without a recession and can even occur during periods of economic growth.
Despite the pressures the market has faced over the past few months, we believe it is important to remain focused on fundamentals. The global economy is strong. Corporate earnings are positive. Interest rates are low. Inflation is tame. Unemployment is low. This backdrop should support continued economic expansion and strong stock gains.