by Lance Roberts, Clarity Financial
Ryan Vlastelica had an interesting post at MarketWatch last week discussing the long “correction” periods.
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“Amid months of rangebound trading, neither index has been able to fully recover and notch new records, which is what would be needed for them to exit correction territory.
Including Friday, both the Dow and the S&P have been in correction territory for 108 trading days. This matches the longest such stretch since the financial crisis in 2008.
Should the two primary market gauges stay in correction through the close of trading on Monday, that will mean they are in their longest such stretch since 1984. In that stretch, it took the S&P 122 days to emerge from correction territory, and the Dow 123 days, according to the WSJ Market Data Group.”
“Despite the bearish record that could be set on Monday, the market is also nearing a more positive milestone. On a total-return basis, the S&P 500 is just days away from its longest stretch above its 200-day moving average in its history.”
There are two very important takeaways from this article.
The first is that long-corrective periods tend to ultimately resolve themselves relative to the level of valuations.
- The long corrective period that ended in 1984 was just coming out of the 1974 crash and two back to back recessions. Valuations were extremely depressed at the time and inflation and interest rates were high and falling.
- The next series of corrections that started in 1998 were early warning signs to a market frenzy but the bigger corrective period preceded the “dot.com” crash. Valuations were elevated and rates and fears of inflationary pressures were rising.
- The next corrective periods were near the 2003-2004 lows of the market as the markets begin to consolidate the bear market bottom. Valuations had fallen markedly, rates and inflation were falling, and excesses had been wrung out of the markets.
- Following the credit-driven rise in the market from 2004-2007, the market once again began a long consolidation period which marked the top of the bull market cycle. Once again, rates and fears of inflationary pressures were rising, the Fed was tightening monetary policy, and valuations were elevated.
Where are we today?
Are valuations low with rates and inflationary pressures falling? Or, is it the opposite?
The second point from Ryan was noting the S&P 500 is about to achieve its longest, total-return, run in its history.
- What happened the last time such an incredible feat was achieved?
It is worth remembering that “records are records for a reason.”
Records are never achieved at the beginning of a cycle.
