Financial Markets Update: “Records Are Meant to Be Broken”

I am sure many have heard the phrase “records are meant to be broken”. When I was growing up, I remember following my Cincinnati Reds’ Pete Rose attempt to break Joe DiMaggio’s record of hitting safely in 56 consecutive baseball games. I listened to the radio as Pete took the plate in hopes that he would extend his streak and challenge Joe. Pete’s streak eventually stopped at 44, and Joe’s record still holds today. Some say this record will never be broken. I say, “Never say never”.

The financial markets have witnessed a few records that have been broken over the past three months of trading. The first was in November when the VIX (the measurement of market volatility) set an all-time record low. In fact, 2017 was a year in which we did not experience one correction of 6% or more. The second record was set Monday when the Dow Jones Industrial Average fell more than 1500 points in a single day. The question on many investors’ minds is, “Is this the start of a new bear market in the stock market?”. I believe it is too early to tell.

My favorite class in college was statistics. I enjoyed analyzing numbers, patterns, and averages. Statistical data can provide a roadmap, especially with investing. Statistically, bear markets last 12 to 18 months from start to finish. There are usually three distinct corrections in a bear market, with two sharp rallies mixed in the middle. Each of these “legs” lasts more than a month. The first correction of a typical bear market can fall into the 7-13% loss range (we have seen a 10% drop from top to bottom in this current correction, so far). The rally that follows the correction has statistically recouped, on average, 70% of the initial correction. Bear markets usually do not start out dropping the way this market has fallen. In 1987 the market encountered a historic drop, which was then followed by new highs a few years later; that was a correction, not a bear market. Investors should keep their goals in mind, and remember that markets never go straight up. When this correction is over, the most important data to me surrounds the inevitable rally. I would expect a market rally that is a sustainable, multi-week rally that eventually reaches new highs. This is how bull markets work. If the rally is sharp and quick, that would be a concern. We were long overdue for a correction, and we are long overdue for a bear market; however, it is too early to determine which this recent fall indicates.

In looking at market fundamentals, the valuation has reached the second most expensive PE reading in history, which has been the case for months. Interest rates have been rising for 15 months, which can lead to inflation. If inflation does indeed follow rate hikes, stocks typically underperform their normal annual returns for 3 to 5 years. It is again too early to tell if this is the start of a new 12-18 month bear market, but history suggests we need to see how the market reacts over the next few months to make this determination.

Indie Asset Partners is always available to answer your questions about the financial markets. Send us an email or give us a call at 317-428.6600.