This latest stock market pullback has provided an unwelcome reminder that stocks do not always go up in a straight line. Even within powerful bull markets such as this one, pullbacks of 5 – 10% have been quite common and
do not mean the bull market is nearing an end. In this week’s commentary,
we attempt to put the pullback into perspective. We look beyond this latest
bout of volatility and share our thoughts on the current bull market, compare
it with prior bull markets at this stage, and discuss why we do not think it’s
coming to an end.
Pullbacks Don’t Mean the End of the Bull Market
Pullbacks such as this one, which has reached 5%, have been normal.
Sometimes stocks get ahead of themselves. When they do, investor concerns
can be magnified and profit taking might take stocks down more than might be
justified by the fundamental news. We see this latest pullback as normal within
the context of an ongoing and powerful bull market and do not see its causes
(European and Chinese growth concerns, the rise of Islamic State militants,
Ebola, the Russia-Ukraine conflict, etc.) as justifying something much bigger.
The S&P 500 has now experienced 19 pullbacks during this 5.5-year-old bull
market, during which the index has risen by 182% (cumulative return of 217%
including dividends). The 1990s bull market included 13 pullbacks; there were
12 during the 2002 – 2007 bull market. At an average of three to four pullbacks
per year, we are in-line with history [Figure 1]. We understand the nervousness
out there, but what we have just experienced looks pretty normal at this point.
When volatility has been so low for so long, normal volatility does not feel..
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