Evening Brief – 10.20.23
A Look at Historical Equity Declines
While the major US equity indices have largely maintained their strong recovery from the October 2022 trough, regaining the January 2022 peaks appears to be a challenging feat at the moment.
The combination of increased geopolitical risk and uncertainty about inflation and interest rates provide compelling arguments for investors to choose a cautious approach.
The market’s recovery from last year’s low hit a snag in the third quarter and continues its downward trajectory. It’s an orderly decline, which allows bulls and bears to make their respective cases.
Despite the advance from October 2022 to July 2023, US equities are still down significantly from the market’s peak in January 2022. The current decline for the S&P 500 Index, for example, is roughly 10%, a significant improvement from the October 2022 low, which was 25% at one point in the year.
Since 1950, the current drawdown is the ninth-longest on record. Several of the harsher drawdowns were on the verge of reclaiming their prior highs at that time. However, there is evidence for significantly lengthier drawdown phases.
The three longest ranged from 1,376 between 2007 and 2009 to over 1,900 trading days during 1973 to 1974. That offers an indication that the current 452-day decline could be the start of a deeper slide from the January 2022 peak.
It’s comforting to see that even after the most severe declines recoveries are long-lasting, though prone to occasional setbacks. The 1973-1974 decline serves as a reminder of how the current selloff could potentially materialize.
During the middle of 1975, at a time when the market appeared to be making significant progress towards recovery, there was a sudden and substantial decline of over 20%. This decline further intensified, reaching over 30%, before eventually stabilizing.
The positive news is that the general pattern following the peak decline has been a strong recovery, which suggests the current selloff may follow the pattern witnessed in the past. Of course, it’s all about timing it.
Eventually, when the news cycle improves, the market will make a concerted effort to reclaim the previous peak. However, it remains a challenge at this time.