Please Read This for Thoughts on the Recent Market Slide

By David B. Armstrong, CFA | Oct 22, 2014 | Weekly Market Commentary

I know this may be a little stale, but man I got hit with some food poisoning and I was down for the count.  Anyway, the market slide.  These things happen. Markets sell off.  Sometimes they sell off for a reason and sometimes it’s just because there are more sellers than buyers.  I believe that investors are feeling this pullback now because we have gone so long without a serious pullback and it’s easy to anchor on what has been experienced recently.  Some smarty-pants refer to it as “Recency Bias”.  I’ve got some stats to share that may shed some light on how often pullbacks happen that may be helpful in understanding why this is probably something to wait out rather than make potentially harmful changes to portfolios.

So it was back on September 19^th that the S&P 500 hit 2019.26 during the trading day and went on a skid through October 15^th when it hit an intraday low that constituted a sell-off of about 9.8%.  This was just shy of a 10% sell-off, which is the commonly accepted percentage for declaring a “correction”.

So let’s just round down to 10% for the purposes of perspective.

Using history as a guide, and some help from the folks at Dorsey Wright and Associates (86 years in this case), how often has the S&P 500 corrected by 10%?

Answer: 93 times.

So let’s call that once a year.  Keeping that in mind, when was the last time we had a 10% correction?

August of 2011.  Remember those days? Calls for a double dip recession for the 2^nd or even 3^rd time depending on whom you deem a credible economist, TV reporter, or screaming CNBC guy from the trading pits. Oh, and we had the debt of the U.S. Government downgraded, too.  Granted, we had a 19% pullback that month, but still, that was the last time we saw 10% (or greater).

So 3 years without a 10% correction.  That probably explains why this pullback has felt harder than it really is.

It’s not to say that there have not been longer stretches of time without a 10% pullback.  2003 to 2007 saw a stretch of about 4 ½ years and that was during what most consider a secular bear market.  The bull market period from the 80’s through the late 1990s saw a 7-year stretch of time from August of 1990 to October of 1997 without a 10% correction.

Finally, for those of you wondering “okay, well how about 5% pullbacks?” Those are much more common, happening 298 times.  Or 3 ½ times a year.  FYI, this is our second 5% pullback in 2014 and since the market bottom in March of 2009, we have had 20 pullbacks of 5% (which includes this current one).

Okay, there is some other stuff to talk about also, but the biggest one is oil.  Energy companies make up a big chunk of the major indices so when they get hammered, the indices reflect it.  While this is a BROAD oversimplification of reality, it’s true that energy companies generally do worse when oil prices sell off.  But, in exchange, the consumer and many other industries will do better since consumers have more to spend when it costs less to fill the tank, and companies do better when transportation costs and production costs associated with the use of oil go down.  But this gets reflected in future earnings so the effect won’t exactly offset at the same time.

As for gasoline, the folks at Bespoke had some data out last week that showed the price of gas in each state.  The national average for a gallon of gas is $3.15 and there are currently 13 states with gas prices under $3 per gallon.  Hawaii is the only state with prices above $4 (and let’s face it, the only thing you can get in Hawaii for less than $4 is an ass kicking at a local’s surf spot).

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