S&P 500 Has Now Corrected 20%, Slightly Worse Than 2011's Drawdown

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Includes: BXUB, BXUC, DMRL, EPS, IVV, PPLC, RSP, RVRS, RYARX, SDS, SFLA, SH, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SSO, UPRO, USMC, VFINX, VOO
by: Brian Gilmartin, CFA

The S&P 500 has now corrected 20% peak-to-trough in less than 90 days, and is now roughly the same severity as the 2011 correction - (maybe slightly worse) in the benchmark, which was 19% and which qualifies as the worst drawdown since the 2008 bottom, if memory serves correctly.

  • 2011: the S&P 500 peaked in May '11 and bottomed in Oct '11, with the S&P 500 downgrade of the US credit rating, and peak-to-trough the correction was 19% over 5.5-6 months.
  • 2015-2016: the 2015-2016 lasted from May '15 to early Feb '16, but the S&P 500 only fell 15%-16%. High yield spreads blew out, the HYG bottomed at $75, and crude oil fell to $28.
  • 2018: this correction has been as severe as 2011 but in just 3 months' time, so it's probably thought to be worse than the sharpest post-2008 drawdown in 2011.

The point is not to start a trivia game for readers but just provide some perspective as to the "post-2008" drawdowns for the S&P 500.

I had thought the 2011 correction was a full 20%, but JPMorgan's excellent "Guide to the Markets" has that intra-year's decline at 19%.

Myriad reasons are being given for this correction: the constant litany of "causality" by the financial media doesn't stop. The shutdown won't help the headlines, but Fed monetary policy seems to be the most popular excuse, while I can't help but think the trade talks have to have created uncertainty for US companies, since 35% of the S&P 500 revenue is non-US. Then we have the Fed balance sheet contraction (technically part of monetary policy, but it really seems to be "quantitative tightening"), Brexit, which I think is a bigger deal than many think since the UK is the world's 5th largest economy, and China slowing (might be trade related with the US, might just be their faux capitalism) is a big deal since they are the world's 2nd largest economy now.

Summary/Conclusion: The S&P 500 fell 300 points in October '18, bottomed near 2,600 and then had a monster rally to end the month. Christmas Eve's pullback was ugly, the worst Christmas Eve ever for the S&P 500, and if you look at the action, it looks some institution is ready to go under, like the 80s with Continental Bank, or Long-Term Capital in the fall of 1998.

Looking at the "intra-year" decline data for the S&P 500 from JPMorgan, there has only been 5 years since 1980 where the S&P 500 has had more than 20% drawdown peak-to-trough, and three of those were the decade from 2000 to 2009. There has been a handful of other years where the drawdowns were in the "high teens" percentage.

What's more interesting is that in the 38 years from 1980 to 2018, the S&P 500 has had a positive return 29 of the 38 years per the JPMorgan data.

The point being that 2018 could end with a negative return for the S&P 500 (highly likely now) and a 20% drawdown together.

Remember what last year was like at this time? The S&P 500 ended 2017 +22%, and everyone was bullish, while bitcoin was the rage.

Things can change both positively and negatively in a hurry.

Thanks for reading.