After Seesaw Morning, Stocks Finish the Day Sharply Higher

financial-advisor-new-york

US Stock Market Returns Positive Again for 2018

After falling 1100 points on Monday, the Dow Jones Industrials gained nearly 600 points on Tuesday with five stocks up for every two stocks down.  The S&P 500, gained 1.4% for the day, is now up 0.9% on the year, but remains down 6.5% from the January 26th high.

Peak to trough (earlier today) the S&P 500 declined 9.7%, not quite a correction (defined as a decline of 10%.)  However, we expect the market WILL have a few more bobbles this week or next, making the correction “official.”  As we always say, “When the stock market has a heart attack, it doesn’t go back to the gym the next day.”

We wrote a client earlier today, “Don’t worry about the correction of the last few days.  On average the market pulls back at least 10% once/year and at least 20% once every 5 years.  What’s weird is how NON-volatile stocks have been over the last two years, with the last correction in January 2016.”

Among investment analysts, there’s a lot of debate about whether the stock market pullback indicates economic stress, or simply a long overdue “pause that refreshes.”  In 1966, economist Paul Samuelson (yes, you remember his textbook from college intro economics) wrote that, “the stock market had predicted nine of the past five recessions.”  Updating his comment through 2017, we can tell you that the stock market has predicted 13 of the past 7 recessions (a success rate of 54%, which you could also obtain by flipping a coin.)   

There are scenarios where we would get concerned.  For example, in 2000 the Internet Bubble drove stocks twice as high as fair value.  In 2008 during the housing bubble, the system was flooded with over-levered investors, who faced the ultimate margin call when home prices fell. At present, the stock market is close to fair value given earnings expectations and interest rates.  There is not much leverage in the system.  Retail investors only recently started buying stocks again.  It will be harder to make money this year, particularly compared to last year’s 21% gains.  But not impossible.