Yesterday, the S&P 500 closed 3.4 percent below its all-time historical high. Bears are coming out of the woodwork, and media outlets are painting a grim picture. Although the modern day S&P 500 Index didn’t come into existence until 1957, Standard & Poor’s has been calculating an index of U.S. stocks since 1923. Dow Jones began the task in 1896. Today we have more than 14,000 days of S&P 500 history. That history extends to about 23,000 days if its predecessor is included and more than 29,000 days if you believe the Dow Jones Industrial Average was a good proxy 100 years ago.
Whichever database you choose to use, the simple fact remains it’s only been in the last couple months that the S&P 500 has closed higher than it did yesterday. Just 47 of the past 23,000 days produced higher closing values. This current 3.4% pullback is nothing out of the ordinary. The 4.0% pullback of April was deeper. The 5.8% decline of February was worse, as were the 4.1% drop ending last October and the 4.6% retreat of last August. In short, there have been four larger selloffs in just the past year.
We are in only the fifth largest decline of the past 12 months, and only 47 days in the history of the S&P index have seen higher stock prices. Is this really cause for panic? It could turn into something much worse, and one of these times it will. Meanwhile the perma-bears are telling you the sky is falling. They will get it right one day, and they will boldly take credit for predicting the bear market. All they’ll need is for you to overlook the dozens of incorrect predictions that came before.
Mainstream media contributes to investor anxiety by magnifying every market move. Fear attracts viewers, and viewers attract advertising dollars. It’s really quite simple. Stepping back to look at the big picture can help you sort through the noise and gain a better perspective.
Russia and Ukraine appear to be on the brink of war. Many are of the belief that war has already begun. Whatever the case may be, it is getting part of the blame for the recent market decline. Gold is trading back above $1,300 an ounce today, but it is still in a three-year down trend, so no real fear is showing there. 10-year Treasury yields are back below 2.5%. This can be considered a flight to safety, or a sign of fear, but a consensus is forming around the idea the economy may not be as strong as some reports suggest. The VIX, also known as the fear gauge, is trading above 16. While this is much higher than it’s been for the past few months, it is well below the spikes above 21 it hit a couple times this past year.
Selling action over the past week hurt every sector, although it didn’t alter the relative rankings too much. Technology sits at the top for the fourth week despite having its momentum chopped in half. Telecom kept its second-place position while relinquishing all its gains from the previous week. The IRS ruling allowing Windstream (WIN) to spin off its fiber and cable network into a REIT (and save on taxes) is a boon for the sector, but market action is preventing this additional value to show. Sprint (S) withdrawing its bid for T-Mobile (TMUS) is hammering the sector today. Health Care was close on the heels of Real Estate and Energy a week ago and easily moved ahead of them today by keeping its losses smaller. Real Estate and Materials round out the top five and remain in the green for now. All lower ranked categories are now registering negative momentum. Consumer Discretionary climbed two spots while Energy fell three, and both are now slightly in negative territory. Financials and Consumer Staples have also moved into the red. However, Utilities and Industrials are clearly the two weakest sectors and have been the only categories to occupy last place for the past six weeks.
Four style categories were in the red a week ago, and now the count has doubled to eight. Mega Cap holds on to its top ranking again this week, but with its upward momentum about to evaporate, we may soon be referring to it as the “least weak” instead of the strongest style. Large Cap Growth swapped places with Large Cap Value, making them the only two style categories to change their relative rankings this week. Like Mega Cap, Large Cap Growth technically has green pixels, although they are probably not visible without extreme magnification. Large Cap Blend is displaying neither positive nor negative momentum, which happens to be good enough to keep it in third place. Large Cap Value and the three Mid Caps flipped over to red. The three Small Cap categories all increased their downside momentum. Micro Cap has now been in last place for twelve of the past thirteen weeks.
China lost some momentum this week, but its decline was much shallower than other global categories. As a result, China’s margin over the remainder of the field increased dramatically, allowing its superior relative strength to be obvious to even the most casual observer. Latin America eased up enough to allow Emerging Markets to share the second place spot. Pacific ex-Japan and Canada swapped positions, lost strength, but kept their longer-term upward trends intact. Japan held firmly to its sixth place ranking, although a flip to the red side is a possibility. The lower portion of the global rankings kept the same order as a week ago. The U.S. is now in the red, which shouldn’t come as a surprise given the weakness described in the sector and style rankings above. World Equity, the U.K., and EAFE are also reporting negative momentum. Last week, only Europe was in the red, and it now seems to be accelerating to the downside.
“As far as the broad market goes, we haven’t had a pullback of any size since April. Every time we see a little weakness, people tend to step in and buy, primarily because they have cash out there to put to work and there’s not a lot of places for that.”
Randy Frederick, Managing Director of Trading and Derivatives for Charles Schwab
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