Stocks Run into Turbulence – September 28, 2020
Stocks have been on a five-month run, with monthly gains for the S&P 500 Index running between 1.8% (June) and 12.7% (April). August’s return of 7% was the second-best advance during the period (MarketWatch data).
Stocks have historically had an upside bias. But the upward thrust is not a straight line, which is stating the obvious.
We know that turbulence and pullbacks are a normal part of investing. September has been no exception. What we can’t forecast is the timing, magnitude, and duration of a pullback.
Since peaking on September 2, the S&P 500 Index is down 9.6% through the recent September 23 low. That follows a 60% advance from the March 23 bottom (St. Louis Federal Reserve data).
Defining our terms
The typical definition of a market correction is a market decline that is at least 10% but less than 20%. A bear market is usually defined as a decline of 20% or greater. Most analysts use the S&P 500 Index as the benchmark, as it is a broad-based index of 500 stocks.
Since 1974, there have been 24 corrections in the S&P 500. Of the 24, five turned into bear markets per data from the Schwab Center for Financial Research.
That is 19 corrections over a 46-year period, or an average of a correction every 2.4 years and a bear market every 9.2 years (past performance is no guarantee of future results).
Bear markets have usually centered around recessions, with the 1987 crash being the glaring exception.
What’s causing the pullback today? Several factors can be cited.
- Led by tech shares and the ‘stay-at-home companies,’ stocks have run up sharply from the March low. Any jitters become a good excuse to take profits.
- Election anxieties may be causing some concern. Given the acidic nature of today’s political environment, there are fears we may not know the winner by the evening of November. Worse, a disputed election would likely add to investor angst.
- Daily Covid cases have ticked higher this month (Johns Hopkins data), which is probably tied to the new school year, especially on some college campuses. Covid cases have jumped in Europe (WSJ), and winter, which may fuel the spread of Covid, looms.
- Congress has been unable to pass a fiscal stimulus bill. While expensive, investors have been hoping for a compromise, which hasn’t been forthcoming. A stimulus bill won’t be cheap, but economic growth has moderated after a sharp jump in May and June.
Bottom line
Control what you can control. You can’t control the stock market, but you can control the financial plan. A well-diversified plan won’t eliminate risk, but it can help reduce volatility and place you on the path toward your financial goals.
Created 2020-09-28 14:45:39
