“With the S&P 500 down 11.7% from its all-time high (2,130 in May 2015), investors are questioning whether a bear market is in the offing,” RBC chief equity strategist Jonathan Golub said on Tuesday. “History shows that sell-offs of 20% or more rarely occur in the absence of a recession (1987 is the only occurrence in the past 50 years).”
In other words, the sell-0ff could get worse should the US go into recession. But — and this is a big but — assuming there’s no recession, this pullback should prove temporary in an otherwise ongoing bull market.
To be clear, Golub acknowledges that risks have increased out there. In fact, he was the first of his peers to cut his 2016 outlook for the market. But investing is all about price, and Golub thinks the stock market’s correction has presented investors with an attractive price.
“While credit spreads have widened, oil prices have collapsed, and profit forecasts are being adjusted downward, the majority of economic indicators point to continued economic expansion,” he added.
This line of thinking is almost identical to the call Deutsche Bank’s David Bianco made in a note to clients on Monday.
“We are not panicked by this correction because we understand it,” Bianco said. “It’s driven by a profit recession centered at certain industries caused by factors that we’ve long flagged as risks with detailed research and quantified sensitivities.”
“All GDP recessions coincide with profit declines, but not all profit declines coincide with GDP recessions and that’s what makes it a profit recession as distinct from a broad recession,” Bianco added.
Buying stocks following spikes in the VIX has been a winning strategy
The current sell-off in the market has been accompanied by a surged in the VIX, or the CBOE volatility index.
“Buying stocks following spikes in the VIX has been a winning strategy over the last 25 years,” Golub said. “This was the case in the market’s two most recent pullbacks (October 2014 and August 2015), when equities gained 11% over the next 2 — 3 months after the VIX rose to 26 and 41. Our work shows that each 5 — 10% move in the VIX corresponds with a 1% move in the S&P 500 in the opposite direction. A move back to more normal levels of volatility represents 7 — 9% upside for stocks.”
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.