January was a big month for the bears.
The S&P 500 declined 5.8% between New Year’s Day and Feb. 3. On the heels of the best year for stocks since 1997, it seemed the long-anticipated market correction had arrived.
Two weeks later, the pullback has already come and gone.
Stocks have rallied since Feb. 3, rising eight of the last 10 trading sessions to essentially erase all of January’s losses. For the year, the S&P is now nearly flat – which means it’s back close to the record-high level where it started 2014. Meanwhile, the VIX has retreated to where it spent most of 2013 after briefly hitting a year high in early February.
What looked like an extended market correction now appears to be just another relatively minor bump in this two-and-a-half-year bull run.
The pullback in January and early February wasn’t the first of its kind during the current rally. In fact, there have been several similar pullbacks in the last year alone.
Consider these recent mini-corrections in the S&P 500:
May 21-June 24: -5.8%
Aug. 2-Aug. 27: -4.6%
Sept. 18-Oct. 8: -4.1%
All three pullbacks were moves of more than 4% in a matter of just a few weeks. Interestingly, the correction last May was identical to the latest pullback in percentage lost and number of days. Perhaps that’s about as far as the market is able to retreat these days.
What’s more, these recent mini-pullbacks have actually been good for the market. Within a month of each of the previous three market corrections, stocks had not only fully recovered – they were establishing new all-time highs. Now, that appears to be happening again. The S&P closed Tuesday trading within seven points of a record high.
Stocks never rise in a straight line forever. Occasionally they need to hit the refresh button and pull back to allow investors a chance to buy at more reasonable prices.
Still, the prices haven’t been that depressed after the recent mini-pullbacks. Most analysts consider 10%, not 5%, to be a “substantial” market correction. The last pullback of 10% or more occurred in October 2011.
It has now been more than 600 trading days since the last 10% pullback. That’s quite a gap. But it’s far from the longest one in history. Since the S&P 500 index was created in 1928, there have been six rallies that have lasted longer than the current one.
In fact, two periods in the last 25 years have dwarfed the current market pullback drought. From October 1990 to October 1997, the S&P went a mind-boggling 1,767 days without a 10% pullback or more. To put that in perspective, this current rally would have to last until Oct. 1, 2018 without a 10% pullback to match that record.
The second-largest gap between corrections came in just the last decade. From March 2003 to October 2007, the S&P lasted 1,153 trading sessions without a 10% pullback.
Despite being back near all-time highs, stocks still aren’t overly expensive. The S&P trades at just over 15 times forward earnings. With U.S. GDP growth improving and the Fed not quite ready to completely pull the plug on QE3 yet, stocks seem destined to continue their meteoric rise – for now.
Wall Street panicked when stocks plummeted in January. Many insisted the sky was falling, and that this surely was the beginning of a long market correction.
Instead, it seems the market was merely catching its breath before another big push.
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