The mood among many investors has pivoted from panic to renewed optimism, as the recent correction in the S&P 500 Index (SPX) has been followed by a strong rebound. The 4.3% gain from February 12 through 16 represented the best weekly performance for the widely followed market barometer in more than five years, The Wall Street Journal reports. The Dow Jones Industrial Average (DJIA) posted an identical percentage gain, for its best week since the 2016 presidential election, the Journal adds.
"The backdrop is as strong as I've ever seen," is what Craig Hodges, portfolio manager at Hodges Funds, told the Journal. He thinks that price volatility may return, but adds, "I do believe all the selloffs long term will be buying opportunities."
Rebound From Selloff
The recent correction took 10.2% off the S&P 500 from its record high close on January 26 through its recent low close on February 8. Since then, the index has rebounded by 5.2%, making the year-to-date increase 1.6%. However, the S&P 500 hit a further low in intraday trading on February 9. If the correction is measured to that point, it becomes an 11.8% decline, followed by a 7.2% recovery through the close on February 20.
Since 1926, the average bull market has lasted nine years and delivered a total return (dividends included) of 480%, per First Trust Portfolios LP. By comparison, the S&P 500 Total Return Index (SPXT) has risen by 385% from its bear market low on March 9, 2009, per Yahoo Finance. Thus, the current bull market is neither unusually long nor robust per First Trust's analysis.
While First Trust counts nine bull markets (including the current one) and eight bear markets since 1926, Yardeni Research Inc. uses a different methodology, tallying 23 bull markets and 20 bear markets since 1928. The longest bull market recorded by Yardeni lasted 4,494 calendar days (12 years and nearly 4 months) from 1987 to 2000, during which time the S&P 500 rose by 582% (dividends not included). After hitting its bear market low in intraday trading on March 6, 2009, the S&P 500 has risen by 307% (dividends not included) through the close on February 20.
Bulls point to improving worldwide GDP growth and strong corporate earnings in the U.S. and elsewhere around the globe. While interest rates and inflation are rising, they nonetheless remain low by historical standards, the Journal adds.
Market strategists at Goldman Sachs Group Inc. are particularly upbeat about that fact that recent price gains have been driven by improving corporate EPS reports, rather than higher valuations. They are not alone. Their counterparts at BlackRock Inc. say that fiscal stimulus from tax cuts is "supercharging U.S. earnings growth expectations," CNBC reports. (For more, see also: Why Stocks Won't Crash Like 1987: Goldman Sachs.)
Investor Confidence Returns
Investors poured an all-time monthly record of $102 billion into equity mutual funds and ETFs in January, per the Journal. The correction spurred a net outflow of $22.9 billion from U.S. stock mutual funds and ETFs in the first week of February, but net withdrawals fell to $7.2 billion in the second week, per fund tracking service EFPR Global, as reported by the Journal. The American Association of Individual Investors (AAII) finds that 49% of those polled now believe that stocks will rise during the next six months, up by 12 percentage points from the previous week, the Journal adds.
The Bearish View
Historically high stock valuations, overbought conditions as measured by the relative strength index (RSI), and a closely linked combination of rising labor costs, inflation and interest rates continue to worry the bears. More recently, concerns have been raised about risky investment vehicles and investing strategies linked to the CBOE Volatility Index (VIX) that present unsettling parallels with the financial crisis and market crash of 2008. (For more, see also: Stock Sell-Off Has Worrisome Similarities to 2008 Crisis.)
If that were not enough, the recent correction was exacerbated by computer-driven algorithmic trading, bringing back nightmarish memories of the 1987 stock market crash. Meanwhile, Investopedia's millions of readers across the globe continue to indicate extremely high levels of worry about the markets, as measured by the Investopedia Anxiety Index (IAI). (For more, see also: How Algo Trading Is Worsening Stock Market Routs.)