(Dec 25): Battered and bruised for three months, a bull market whose durability has exceeded all others lurched within a few points of its demise on Christmas Eve, extending one of the roughest stretches for equities since the financial crisis.
By the thinnest of margins, the S&P 500 was spared its first 20% decline since 2009, a period that spans two presidential administrations and three Federal Reserve chairs. Investors hoping for a respite from volatility before the break got yet another powerful dose, as the equity sell-off that has defied every hope of ending showed itself no respecter of holiday cheer.
At the end of Monday’s mercifully abbreviated session, the benchmark gauge for American equities sat at 2,351.10, down 19.8% from its Sept. 20 close and just seven points from the bear market threshold. Compared with its intraday high on Sept. 21, the gauge is down 20%. The Dow Jones Industrial Average fell 1.6% to end 1.2% above a bear.
“Even if 20% is just a psychological number, it is psychologically very important,” Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, said by phone. “We’ve been trading like we’re already in a bear market for the past few weeks. I don’t know if it would create panic, but if we break below the 2344.5 level, that would be very unsettling.”
With every big lurch -- and there have been a lot lately; the average one-day decline in the S&P 500 this month is 1.6% -- markets move closer to becoming more than just a problem for investors, but a drag on the economy itself. In testimony last week, Fed Chairman Jerome Powell indicated he didn’t see the slump as meaning much for the economy, though the Dow was about 1,500 points higher than it is now when he was speaking.
“The markets going down will eventually create an economic problem,” said Ernesto Ramos, head of equities at BMO Asset Management. “We’re not there yet but getting pretty close. People who spend money as consumers, if they have stock exposure, they’re reconsidering if they’re going to buy a US$1,000 present -- they’ll buy a US$200 one.”
Newspapers are “headlining market drops, the worst month since 2008, or worst week since 2008,” Ramos said. ”All of these headlines are in the front. They’re not buried in some back page. They’re seeing the market is taking a hit, and their 401k is tied to it.”
While a dozen things have been blamed for the plunge -- slowing growth, trade tariffs, stretched valuations, Brexit -- its latest segment has come amid increasingly frantic emanations from the Donald Trump White House. Over the weekend, Treasury Secretary Steven Mnuchin had to reassure markets that the president has no plans to fire Powell after Bloomberg reported Trump had discussed the step repeatedly in recent days.
Mnuchin took to Twitter again on Sunday to say he’d spoken to heads of the biggest U.S. banks about liquidity and lending infrastructure, and reconvened a presidential working group established to sort out the Crash of 1987. While equities have never needed an obvious reason to fall over three months of tumult, it’s safe to say that neither gesture steadied the decline. Neither did a fresh tweet Monday from Trump blasting the Fed.
For investors who thought they’d spend 2018 basking in the tidings of Trump’s tax overhaul, the slide has been particularly brutal. Little in the economy seems to justify such a steep decline -- a danger of ascribing too much cause-and-effect to equity prices. The CBOE Volatility Average, which started the year at 11.04, surged Monday to 36.07.
“Going through the whole month of January, everything was still all-system’s go, hunky dory, so-to-speak. But then once the president brought up the tariffs and a trade war, then the entire global economy kind of lost a significant amount of steam,” said Scot Lance, managing director at California-based Titus Wealth Management “It’s ironic that we’ve come to this bear market, or a potential one -- I don’t see how it’s stoppable frankly -- but it’s kind of unprecedented how we have.”
While both earnings and the economy are forecast to slow next year, neither is anywhere near a full blown decline. At US$173 a share, consensus estimates for S&P 500 earnings in 2019 are down marginally from a few months ago, but still represent an increase of 35% from last year -- not the sort of profit performance usually associated with big declines in equities.
The apparent calm in the economy and Corporate America is a bitter irony for bulls with a sense of history considering some of the things that failed to torpedo the decade-long rally in the past. There was the stripping of the U.S. government’s AAA credit rating, which led to one of the most volatile stretches ever recorded in August 2011, but no 20% plunge. There was the May 2010 flash crash which knocked the Dow down as much as 9.2% in one day.
Of all its traumas, the closest the S&P 500 has ever been to a 20%, close-to-close bear market plunge was from April 29 to Oct. 3 in 2011, when headlines about Europe’s sovereign credit crisis pushed the benchmark within points of a formal bear market. That decline ended with a one-month, 10.8% surge, the best monthly return of the bull market.
Going back to the 1940s, there have been 14 bear markets with half of them taking place during a recession, according to LPL Research. Those that came during an economic downturn were more painful, the S&P 500 falling 37% on average, while bear markets with no accompanying recession lost a lesser 24% at the trough on average.
“As we’ve seen over the past 40 years, if the economy is on firm footing, bears tend to stop around a 20% loss and the occurrences of a massive drop are quite limited,” said Ryan Detrick, LPL senior market strategist. -- Bloomberg