The 1% fall in the S&P may not mean the end of the bull run

22nd March 2017

America’s S&P 500 index fell 1.4% on Tuesday, its first daily fall of more than 1% since October. But the end of the third-longest such streak since 1970 does not necessarily herald the end of the bull run in US stocks, at least if history is any guide says investment platform AJ Bell.

Tuesday’s fall ended a stretch of 110 days without a daily drop of more than 1% in the S&P 500.

Russ Mould, investment director at AJ Bell, says: “Any break in such a strong run inevitably raises the question of whether the bull market in US stocks is primed to come to an end, given the absence of immediate legislative progress from the Trump administration, three interest rate increases from the US Federal Reserve and valuations which on some measures (notably market cap to GDP) which look very stretched.

“However, history suggests the ending of a streak without any marked losses does not necessarily signal the end of a bull market. Analysis of the next nine longest such runs highlights how the average gain in the S&P 500 over the following 12 months was 13.1%.”

Streak with out 1% drop S&P 500 performance after end of streak
Start End Days Gain 3mth 6mth 12 mth
3-Jan-85 13-Jun-85 116 12.6% -2.1% 10.2% 28.7%
7-Dec-94 18-May-95 114 15.1% 5.7% 13.5% 28.3%
7-Oct-16 20-Mar-17 110 10.2%      
21-Jul-95 19-Dec-95 108 10.5% 7.6% 9.6% 18.8%
8-Oct-92 08-Feb-93 91 9.8% -1.0% -0.2% 4.7%
9-Jul-93 02-Nov-93 85 4.5% 2.9% -3.3% -0.4%
7-May-79 30-Aug-79 82 10.1% -2.0% 3.1% 12.0%
9-May-72 22-Aug-72 80 7.3% 0.2% 2.0% -10.6%
7-Apr-14 15-Jul-14 71 7.0% -5.6% 1.0% 6.8%
6-Sep-96 10-Dec-96 68 14.0% 7.6% 15.7% 29.7%
             
AVERAGE 93 10.1% 1.5% 5.7% 13.1%
Excl. latest run 91 10.1%      

Source: Thomson Reuters Datastream

“The 1985 streak ended after 116 days but even the 1987 Crash did not derail a bull run which ended in 1990, while the five runs without a 1% loss across 1993, 1995 and 1996 were part of a huge market advance that only fell apart in 2000.

“However, this is not to say investors can be complacent. With the VIX, or Fear Index, trading at just 12.4, compared to its lifetime average of nearly 20, and flotations such as Snap, Mulesoft and Canada Goose offering the first potential sign of froth appearing in the markets, investors should at least prepare for further volatility in US stocks, especially if the Trump plan gets off the ground more slowly than hoped.

“The budget blueprint featured little or nothing about new infrastructure spending, the move to repeal and replace Obamacare is already mired on controversy on Capitol Hill and details of planned tax reforms have yet to be released, amid fierce debate over whether the Border Adjustment Tax is a feasible proposition or not.

“Even bulls of Trump need to remember that the market dipped for the first two years of the Reagan administration, to which that of the new President is now being compared politically, before the huge gains of 1983 and beyond when GDP growth soared briefly to 8%.

“Those bulls also need to remember that Trump is inheriting a situation which allows him less room for manoeuvre than Reagan had, while stocks are entering the ninth year of a bull run, while they were just coming out of a bear market under ‘The Gipper’.”

  Reagan   Trump
  1981 Trend   2017 Trend
Fed Funds rate 18.0% Down   1.00% Up
US 10-Year Treasury yield 15.0% Down   2.4% Up
US 30-year mortgage rate 16.0% Down   4.2% Up
Total US debt to GDP* 96% Up   215% Up
US inflation 8.0% Down   2.7% Up
Shiller CAPE 9.0 x     29.0 x  

Source: FRED, St. Louis Federal Reserve database, Federal Reserve Bank of New York, www.econ.yale.edu/shiller/data/ie_data.xls. * Excludes pension obligations.

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