Volatility has picked up in the global financial markets. The S&P 500 is down by 5% from its September 19 all-time high of 2019.
Investors and traders are understandably nervous.
But sell-offs happen.
“Investors now worry that the current decline in the S&P 500 is the beginning of a larger correction triggered by signs of a global economic slowdown,” Goldman Sachs’ David Kostin writes. “We recognise the S&P 500 has not experienced a 10% sell-off since June 2012, a span of more than two years, which is an unusually long time based on historical trading patterns.”
Sneider included a chart of annual maximum drawdowns in the S&P 500. These are the declines from the high to the low.
As you can see, every year of the current bull market has seen some violent sell-offs. In fact, we actually experienced a 6% pullback from January 14 to February 3 of this year.
“[T]o put the recent dip in perspective, the S&P 500 has still returned 5% YTD even after the current sell-off,” Sneider continued. “A 10% correction from the peak would involve the S&P 500 falling to 1810.”
Sneider, however, doesn’t expect the current sell-off to get that ugly. From her note: “First, while investors are justifiably concerned about a slowing world economy, US GDP is expanding at an above-trend pace. Second, we expect a resumption of corporate buyback activity once earnings season ends for most firms at the end of October. Third, the prospect of another year of low US interest rates should insulate the domestic equity market from a large correction. Fourth, our sentiment indicator points to extremely low net positioning which suggests S&P 500 will rally during the next 4- 6 weeks. Fifth, historical trading patterns suggest a near-term S&P 500 trough 6% to 8% below the recent all-time high which implies an index level between 1850 and 1890.”
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