Market Insights: What a comeback!

Milestone Wealth Management Ltd. - Mar 11, 2016
To start the year, we have seen both the S&P 500 and the S&P/TSX Composite decline by more than 10%.  In fact, by many measures, this has been the worst start on record for the U.S. stock market.

What a comeback!

To start the year, we have seen both the S&P 500 and the S&P/TSX Composite decline by more than 10%.  In fact, by many measures, this has been the worst start on record for the U.S. stock market.  However, since February 11th, there has been a strong rebound in equity markets around the world, with the S&P/TSX Composite completely wiping out that year-to-date decline and currently sitting in positive territory.  The S&P500 is also very close to erasing the earlier loss.  

 

So what does all of this mean for the short or intermediate-term?  There is never a completely reliable indicator, but we thought the U.S. data on this was interesting to examine (the Canadian data is not available).  Essentially, based on past history, we should expect a decline in the near-term, with the markets picking up steam a few months out.  A potential short-term pullback seems reasonable, since it has likely taken all the energy out of the markets just to get back to where the year started.  History informs us that, once this short-term oversold condition is relieved, the probability of positive returns is good, looking out over the space of a year. 

So let's delve into the data.  How has the S&P500 fared after returning to positive territory, following a greater than 10% year-to-date decline?  In the last 90 years, there have been fifteen such occurrences (not including the year in progress which hasn’t quite turned positive yet).  Of those occurrences, the average returns one month later, six months later and one year later are -2.8%, +4.5% and +13.8% respectively. These are strong results, with twelve of the fifteen occurrences being positive after a year.  Of course, a few of these occurrences were negative six to twelve months out; however, any forecast can be based only on the probabilities, and are, of course, not certainties.  

We can, however, narrow down these probabilities further by looking at the above occurrences that are most similar to our current market situation. If we focus on the occurrences in which the U.S. was not in a recession (which it currently is not), the outlook shows even greater improvement.   Seven of the fifteen occurrences noted above happened outside of a U.S. recession, and in these cases, the average return outlook improves to -0.9%, +5.7% and +16.3%.       

Although we definitely can't say that there is an overwhelming statistical significance for this potential outcome, we can say that it is one more positive to keep in mind as we work through the current correction.