At some point this market will have a bear market and very well could coincide with a rising rate environment. Trying to time or predict when it will happen is fool's gold. What we do know from market history is that pullbacks, corrections, and bear markets are a normal part of investing. A pullback is defined as a decline of 5% to 9.9% and occurs on average 2.5 times a year. Corrections (10% to 19.9% selloffs) happen every one and half years and a bear market (>20% loss) nearly every three years. A study from JP Morgan says the average intra-year drawdown in the S&P 500 is 14.3%.
A good example is 2021 which has been in a sustained bull market. The S&P 500 has experienced two pullbacks in 2021 while maintaining a strong uptrend. Meanwhile, the Nasdaq has been through four such pullbacks this year in what has been characterized as a volatile climate for growth stocks. Trying to rationalize every wiggle in the market is another futile exercise. Regardless of how you calculate the data, selloffs happen and happen more often that thought for various reasons.
The latest excuse for market weakness: Fed's tapering of liquidity, Omicron variant, debt ceiling, etc. Yet if look back at history to the last taper tantrum in May of 2013 the S&P sold off 5.8% in the next month but rallied 17.5% for the rest of the year. According to Sam Stovall at CFRA Research, "After a very minor pullback known as the 'taper tantrum' stocks took off. Above average market returns across all styles, sectors and up to 80% of all sub-industries. That goes for not only the market rebound after the "tantrum" but the 10-month period that included the actual Fed tapering activity. In the 10-month tapering period, from mid-December 2013 to the end of October 2014, the S&P 500 rose 11.5%, according to CFRA Research. The likely reasoning, Stovall says, is that investors concluded if the economy was strong enough to withstand the removal of supportive bond-buying activity, it was healthy enough to continue to expand on its own."
At Worch Capital, we believe the eventual bear market will be brought on by a move in interest rates or an unpredictable market event outside of the normal business cycle. If history is any guide we should be due for one around the summer of 2022. These numbers are based on averages and can vary wildly. For reference, the longest bull market lasted almost 8 years, so anything is possible. So with all the recent doom and gloom I wanted to look at some data that shows some potentially bullish signals going forward.
While the Federal finances are a mess, consumers are showing an extremely healthy balance sheet as total assets are hitting new highs while personal liabilities are making new lows.
Charlie Bilello had a recent tweet showing the VIX had the 4th largest one day % increase in its history as it rose 54% on 11/26/21. His key takeaway: "the market tends to rise over time and tends to rise more following volatility spikes (note: on average, there are always exceptions and this latest spike could very well be one).
His data shows the S&P has been higher one year later every single time the VIX has spiked 40% or more. Our own data confirms this, but has one negative period one year later which was in 2007. Below is data on the Nasdaq's performance after a VIX spike of 40% or more.
Between the two studies the S&P and Nasdaq average 20%+ returns a year later after a VIX spike.
Another study by Ryan Detrick at LPL Research shows "that when stocks are up more than 20% for the year heading into December (like 2021), the final month actually does better, up 1.7% versus 1.5%. Also, it has been higher eight of the past nine times the year was up more than 20% heading into the final month.
One area that we monitor that is worrisome is the massive divergence in breadth. These divergences can last months and sometimes years and most of the time they reverse themselves. But when you get a hard break in the markets accompanied by weak breadth that is usually a time to play more defense than offense. For now the market indices have maintained their up-trends. The weak breath proves how narrow this market remains with a handle of mega caps holding up the indices. Underneath the surface many stocks are well off their 52-week highs. Unless this current turbulence turns into the next bear market (ie: 2018 and 2020) the current weakness is getting very close to oversold levels and where the market has usually found buyers. Below is the % of stocks trading above their 50 day moving average on the Nasdaq. The yellow lines show areas where the market found a low and started to bounce.
At the end of the day price pays. But the data above gives some comfort to the bulls. It is never easy and sometimes very messy but focusing on fear mongering is not a good strategy. There are always things to worry about in investing. We try and parse the data and come up with a thesis. Yet, when price diverges from that thesis we adjust accordingly.
