If you think that it’s been a while since the US stock market suffered a large decline, you’d be right.
It’s now been 93 trading sessions since the US S&P 500 has suffered a decline of 1% or more, the longest stretch since November 2006, over a decade ago. If there’s no slide of that magnitude in the next two sessions, at 95, that will mark the longest consecutive since December 1995.
The chart below from Goldman Sachs’ US portfolio strategy team shows the near unbelievable, and unprecedented, run of days without a loss of 1% or more.
After such a phenomenal run, it’s perhaps unsurprising that it’s also been a while since the index has suffered a correction of 10% or more. It’s now been over a year, and more than seven months since we’ve even seen a pullback of 5% or more.
It’s been a monotonous, grinding run higher since concerns over the Chinese economy flared in the early parts of 2016, sending US stocks to record high after record high in recent weeks.
To some, the rally — accompanied by a lack of market volatility — is a concern, particularly given the recent gains have been fuelled by hopes for what Donald Trump will be able to deliver to financial markets in his term as US president, potentially laying the foundation for a market correction should these lofty expectations not be met.
While that’s still a clear risk, as Goldman points out, just because it’s been a while since we’ve seen a decline of one percent or more on the S&P 500 doesn’t mean that a large correction is likely to follow when the run finally comes to an end.
“Long periods of market stability are not good indicators of drawdown risk,” the bank says.
“Since 1980, there have been only six instances of the S&P 500 trading for 80 or more consecutive days without a 1% decline.
“Following the end of these stable market periods, the S&P 500 actually registered a positive three-month return in five of six episodes, with a median 6-month return of 9% and a 12-month return of 15%.”
So, if history is anything to go by, the recent low-volatility rally may not be a sign that an impending correction is on the way, but rather that further gains could be on the way.
The S&P 500 has added 5.74% so far in 2017, extending the rally from the lows of November 4 last year to 13.61%. From the depths of the global financial crisis in mid-March 2009, it’s now gained 255%.