It has been quite a couple of days in the financial markets. Today marks the latest in a sharp drawdown around the world. Japan has been hit particularly hard, but the pullback is global. Here in the U.S., for example, the S&P 500 is down about 3 percent for the day (as of this writing) and just shy of 8 percent off its all-time highs. The Nasdaq is doing even worse, down almost 4 percent for the day and 14 percent off its all-time highs.
This is a substantial pullback, and it has happened quickly. It is natural to worry about what might come next. But in context? It doesn't look quite as bad as all that.
We’ve Seen This Before
Let's look back at history because we have seen this before. In April, the S&P 500 was down more than 5 percent—and bounced back. In July through October of last year, the S&P 500 was down more than 10 percent—and bounced back. And in August through October 2022, the S&P 500 was down almost 16 percent—and bounced back. In every one of the past couple of years, we have seen a substantial pullback in July or August, only to see markets rebound. Although this does not guarantee future results, this looks like the latest iteration of something we have seen multiple times before.
Looking back further to 1980, according to J. P. Morgan, the average intra-year drop is around 14 percent. So, the current pullback is still well within the normal range. More, even given that average drawdown, the market had a positive return in three out of four years. A midyear pullback has been entirely normal over the past several decades, and it certainly hasn’t meant a down year.
Of course, history can guide us, but perhaps things are different this time? So, let's look at the current data as well.
Positive Trends Continue
Let's start with the overall trend, represented by the 200-day moving average. If the index is above that trend line, then the trend is still positive—and both the S&P 500 and Nasdaq are. We are still in an uptrend. Seeing indices drop back to the trend line is usual and healthy. Even if the indices were to break the trend line (which, as noted, they have not), we can still reasonably expect a rebound. We've seen that several times in recent years as well, most recently in October of last year. Market pullbacks are common. Even sudden and large ones have typically petered out.
Consistent with that positive trend, even with the current turbulence, markets are in fact still up for the year. The S&P 500, as I write this, is still up just over 8 percent for the year, while the Nasdaq is up just under 8 percent. Those are pretty strong numbers, even after the substantial pullback we have seen.
Reasons for Optimism
If we ended the year now, it would still be a pretty good year. But the year isn't over yet. In fact, we might end up with even better results, as there is the real prospect of a recovery as we move into the end of the year. July and August have been among the weakest months for market performance, as we have seen in the past couple of years, so a pullback around now isn't really a surprise. As we move into the end of the year, when performance has been stronger, we believe there is an opportunity for that seasonal tailwind.
It is possible that we will see a bounce when the pullback ends. According to Bespoke Research, a market consulting firm, after a day like today, markets historically have shown gains of over 10 percent from the pullback bottom, almost 9 out of 10 times over the past several decades. With all the current concern, there are also reasons to be optimistic looking forward. The current pullback doesn't mean markets can't bounce back—and history has shown that markets have done just that.
Market Pullbacks Are Normal
But we still have the current pullback, and we can't minimize the very real concerns we have right now. There is a lot going on here in the U.S. and around the world to worry about. That is certainly weighing on both investors and markets. But again, with each past pullback we had similar worries, and markets have recovered. We believe that this too will pass.
Pullbacks are normal, but every time is scary. And every time we need to pay attention. But in the end, although there are real risks out there, right now everything is still fairly normal, in our view. We will be keeping an eye on things, but the best course of action remains simply this: keep calm and carry on.
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Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.
The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.
One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.
The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.
The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.
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