by Ralph Cole, CFA
Director, Equity Strategy and Portfolio Management
The S&P 500 rallied 9 percent in the fourth quarter of 2019 and continued that torrid pace at the start 2020. As investors, we know that near-term sentiment can get ahead of fundamentals, and we felt that was the case early in the year. What would cause the market to pull back was not as easy to determine, but it appears earnings and the Coronavirus are the current catalysts for selling stocks. Now seems like an appropriate time to remind investors how we manage through turbulent times, and how we view market corrections versus bear markets.
Each year on average the S&P corrects approximately 13 percent. Last year, the largest drawdown in the S&P 500 totaled only 7 percent. It was an uncharacteristically calm year; as a matter of fact, we had the second fewest daily moves of plus-or-minus 1 percent in 50 years. At Ferguson Wellman, we don’t try to time these almost annual corrections. The chart below provides greater clarification on corrections and bear markets.
Source: Strategas
2018 and early 2019 were perfect examples of this phenomenon. The market correction in 2018 saw the S&P 500 fall 19.9 percent on fears of a global slowdown, and a “tone-deaf” Federal Reserve. Stocks bottomed on Christmas Eve and recovered all of their losses by the end of April of 2019. Simply holding through the volatility was rewarded handsomely during the balance of the year.
Corrections are much less sinister than the average bear market, as depicted in the chart above. Bear markets are usually associated with a change in the economic cycle, meaning that the market is moving from economic expansion into a recession. We view bear markets as tradeable events and position portfolios more conservatively when we see a recession on the horizon. That is not the case today.
We believe the U.S. economy is on solid footing. The Purchasing Manager Indexes (PMIs) in the rest of the world have started to bottom and are expanding again. Our belief currently is that the Coronavirus will slow down this recovery process … not derail it. Coronavirus will definitely have a bigger impact on China and Southeast Asia, but may slow first quarter growth in other countries around the world. We believe the U.S. economy and consumer are in solid position to grow for an 11th connective year.
Week in Review and Our Takeaways
The S&P 500 declined 2.2 percent on the week as the market continued to digest the implications of the Coronavirus
We believe the Coronavirus could lead to a correction in stocks from recent market highs
We don’t believe that the economy is heading toward a recession in the next 12 months and don’t deem any selloff as a tradeable market event