October 26, 2018
A tumultuous week for markets around the world ended with the S&P 500 on the cusp of correction territory as investors continued an October retreat from risky assets. For the week, U.S. markets finished down 4% adding to last week’s losses and bringing the decline to 10% since setting a new high on September 20th. In the past few weeks, the market has gone from worrying about the U.S. economy overheating to a potential recession being around the corner.
We view this sell-off as a normal correction – with the underlying economy still strong, the consumer still confident, and corporate profits robust.
The yield on the U.S. 10-year Treasury bond fell to 3.07%.
As a Reminder…
The way I think about the markets goes something like this: the future is always unknowable, history is a pretty good guide, you have to take the present into account, but anything is possible so expect the unexpected.
Here’s the base case:
Stocks have seen an average annual increase of 21% in up years and a loss of 14% in down years since the late-1920s.
Stocks see an annual gain in the 8-12% range just 5% of the time.
70% of all calendar year periods see double-digit gains or losses.
Over the past 90 years, U.S. stocks have seen gains in 66 calendar years and losses in 24 years.
There have been 34 double-digit drawdowns in the S&P since WWII (22 of those occurred outside of a recession).
The average intra-year drawdown from peak-to-trough in the S&P 500 since 1950 is close to 14%.