As bad as the prior week felt, the 5 trading days ending Friday February 9 were even worse with the S&P500 experiencing two selloffs approaching of around -4% each on Monday and Thursday; the 2nd brought the peak-to-trough giveback from January 26 to more than -10% and crossed the threshold for what is technically defined as a correction. It is crazy to think it was just Jan 26 when the major US indexes and client portfolios hit fresh all-time highs and retail investors seemed to be charging head-first into equities for apparent fear of missing out. How different the mood suddenly feels. Still, we are not in any way surprised to be seeing the market finally experiencing pressure. It was overdue and arguably healthy; weve been de-risking client portfolios in anticipation of such via some tactical adjustments and rebalancing efforts; those adjustments are helping as client portfolios are off nowhere near as much as the major indexes.
With those acknowledgements made, the pace of the pullback in the last 10 trading days is admittedly unsettling. But we cannot recall a time where a meaningful multi-day pullback was comfortable. Its never fun getting slapped around, even if one was preparing for it. What we can say with confidence is that unlike most of the pullbacks that occurred since the conclusion of the financial crisis roughly 9 years ago, this is occurring inside a fundamental backdrop that is quite strong. No economic recession ever began when corporate earnings were still rising (as they are today). This attribute is global as well not just here in US. Another early signpost for recession and the true inflection point for markets in the past is an inverted yield curve; inversion always gave investors an advance multi-month notice to be on alert. Interesting then that the yield curve has actually steeped since the beginning of the year and start of this correction and remains upward sloping. Even corporate bond yields (another historical lead to market/economic problems) are not flashing big warnings (yet; we continue to monitor). Those conditions today, combined with elevated business confidence and a just-enacted tax cut point to there being more fuel left in the tank. And, as one of the pieces we receive notes in the recent week, dips of this magnitude or even several that are larger, are not in any way abnormal inside of broader up-trends. Actually the period of 400 trading days we just enjoyed without so much as even -5% or more giveback is highly rare. That period provided a false sense of security to everyone making recent pressure feel all the more alarming in our view.
As we enter a third week since the market was enjoying seemingly no-limit to new highs, the technical attributes one might look for to identify a tradeable low seem to be developing. The market is oversold on many measures; if one measure is missing it is that so far the pullback remains short from a time perspective. Most important though is that the underlying economic fundamentals that propelled financial assets to their recent highs remain firmly in-place. This week, the economic data release calendar is full of items that will contain updates to inflation readings. Rising inflation is what is widely being credited as the spark to the recent volatility fire, so data points this week are significant. We do remain vigilant however; if technical pullbacks such as this persist too long they can risk damage to the underlying economic fundamentals and begin to change the facts. But trying to remove the emotional element and refocus on what drives returns over time, it is hard to not view the current pullback as a buying opportunity where there is new cash to be deployed. This notion has even more merit when one considers that from a valuation (price-earnings) perspective, US equities are the cheapest they have been in more than 2 years. They are especially attractive with the awareness that rising interest rates are a headwind to traditional bonds.
At the risk of sounding too confident, we the current pullback is nearing a conclusion and the bull market will resume and establish yet new all-time highs. But we are also in latter innings of this bull market (note: later innings are often the most profitable/rewarding of any), and vigilance will remain appropriate. Evidence suggests however that outright market timing is not profitable either: in the words of famed investor Peter Lynch, far more money has been lost trying to anticipate/avoid corrections (via missing out on further up-progress) than is lost in the corrections themselves.