Stock Market Sell-Off Got You Down? - Put Things In Perspective

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Includes: DIA, QQQ, SPY
by: Learn Bonds

In a most inauspicious start to the 2016 trading year, the stock market has slimmed down about 7% during the first 10 market sessions of January. As is often the case, those not used to sudden stock market flameouts are starting to question "where's the bottom?"

Of course, no one really knows that answer. With the market trading marginally higher on Tuesday as I write this article, worrywarts of the world may be breathing a collective sigh of relief. While this may be a one-day respite before resumption of the equity sell-off - although the day 's not quite over yet - it's difficult to offset the pessimistic overtones that accompany stocks nowadays.

Indeed, some may be running around like Chicken Little screaming at the sky. But put into perspective, a 7% drawdown in market value is not particularly meaningful. In terms of index value, we've watched SPY - a bellwether large-cap market index - sink from $201 a share to about $187 a share. A stock trading at $100 has dropped to $93.

Going back to last year, the peak to trough decline in SPY sits at about 12%, clearly a somewhat more painful deterioration. Still, we're not yet flirting with what is widely considered a bear market - a 20% decline. That doesn't mean that some stocks haven't reached that point, however. Legendary market blue chip stock International Business Machines Corp. (NYSE:IBM), for instance, is now 40% off highs set nearly three years ago.

Energy stocks have been another obvious underperformer as the price of crude cascades lower. Exxon Mobil Corporation (NYSE:XOM) is down about 25% from its high, and Chevron Corporation (NYSE:CVX), like IBM, is down 40 percent. If you've been unlucky enough to concentrate in more oil-price-levered equities, like drillers, you could be sitting on 50, 75, or even 90% losses. Clearly, if you've over-concentrated in energy or have been generally unlucky with your equity selection, you're feeling much more uncomfortable than the average investor sitting in a more diversified index.

Looking Around The Globe

Even at a 12% peak to trough decline, American equities have fared much better, comparatively speaking, when looking at some other global equity indices. The Shanghai Composite Index, which measures Chinese stock performance, is only down marginally from this time last year. In the interim, however, Chinese stocks ramped 65% during the first half of 2015, only to crater about 40% to where they sit now. Talk about volatility!

On a more general emerging markets level, EEM, the iShares MSCI Emerging Markets Index, has been a lackluster performer since the financial crisis. Though rising nearly five-fold from its introduction in 2003 until a peak in 2007, this ETF has dropped nearly 50% in the nine years since. Meanwhile, over this same 2007-2016 time period, SPY has appreciated about 20 percent.

SPY - 20-Year Price Performance

Recent U.S. Market History

If we look back about 20 years in order to judge how domestic equities have performed, the extent of the volatility might surprise you. Between 1995 and the height of the technology/growth stock bubble in Y2K, SPY rose about four-fold. After the so-called bubble exploded, the market sold off nearly 50% until it began to climb once again in 2003.

In 2008, pre financial crisis, stocks topped out almost exactly where they were in 2000. After sidestepping disaster, a somewhat unfettered climb occurred between March of 2009 and early 2015, which nearly tripled SPY's value.

Future Stock Market Speculation

Although I don't care much for index predictions, I think it's clear that the market has room to do some back and filling right now. Extended valuations, a Fed that has turned ever so slightly hawkish, a Presidential election year, and what might be considered as "general global economic concerns," are all converging at the present time, creating considerable investor angst. While conditions today don't seem to be of the type that created the two major market selloffs over the past 20 years, it's hard to say that we're in the clear.

Meanwhile, the dramatic drop in oil, while beneficial to gas guzzling consumers, may end up being a net negative, given the loss of jobs and cascading economic impact it may have on non-energy-centric companies that depend on oil capex.

On the plus side for bulls, interest rates remain low, which would point to generally overweight stock allocation and higher multiples, assuming earnings do not deteriorate, and/or a black swan event, or other smoking gun, does not come into the picture.

Still, all things considered, I would be inclined to say that downside risk is still greater than upside potential at the moment in the domestic equity space. Though this may not bring about a cataclysmic equity decline, it could mean that we are in for a significant period of rangebound trading, which might be good news for the more nimble and opportunistic, but not such good news for indexers or long-term investors.

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