According to history, a bear market still can be averted.
Dow Jones industrial average recently dropped almost 250 points, and renewed fears that a bear market — which Wall Street has not seen in almost 7 years — might be upon us. The Dow, at the worst of the sell-off, dipped by as much as 566 points recently, spurred by an oil slump, which dipped under $27 per barrel amidst fears of an economic slowdown around the world.
Don’t jump the gun and assume that a bear market is inevitable. Here are 3 reasons why it might not be:
A poor January does not mean a bad year
So far in January, the S&P 500 and Dow indexes are off almost 10 percent, and it represents the worst beginning to a new year in the history of Wall Street. However, a poor January doesn’t mean it’ll be a down period for stocks.
As a matter of fact, the 5 worst Januaries for stocks prior to this year’s debacle occurred in 2009 (S&P 500 was down 6.6 percent in the initial ten trading days), 1978 (it was down 6 percent), 2008 (it was down 6 percent), 1935 (it was down 5.7 percent) and 1982 (it was down 5.1 percent).
But just one of these episodes — 2008 — was a down year.
Following the initial ten days in January of 2009, for example, stocks rose 32.2 percent and S&P 500 ended up finishing the year up over 26 percent. In 1982, similarly, the S&P gained 21 percent after the initial ten days of January. Stocks in 1978 ended up rebounding 7.5 percent after a poor January. Stocks in 1935 rose 49.9 percent after January and finished the year up 47.7 percent.
It appears similar to the sell-off of August 2015
The market swiftly fell into a “correction” and appears to be unsettled. However, Charles Schwab’s chief investment strategist, Liz Ann Sonders, reports that the sell-off appears much like the one in the summer of 2015, in which the Dow dipped as much as 14 percent prior to enjoying a rally at the end of the year.
Sonders adds that the correction is like last August’s — a rapid price dip for a market which recently had been close to multi-year highs.
She adds, historically there is a binary outcome after these types of events. Either the market will worsen because the slide in stock is foreshadowing a future recession, in which instance the sell-off might turn into a bear. Or there isn’t any future recession and eventually the markets rebound.
According to Sonders, all predictive recession models she has researched still suggest a low recession risk. As a matter of fact, if we’re in a recession or headed toward one, it’d be the first time the top indicators didn’t roll over and offer enough warning.
Bigger stocks do not have to follow smaller stocks
You might’ve taken notice that small stocks already are in a bear market—they are down over 23 percent from their highs in 2015—which a few people interpret as an indication that big blue chips soon will follow. However, it isn’t necessarily so.
According to Sam Stovall, United States equity strategist for S&P Capital IQ, most consider small-caps the canary within the coal mine, and imply that the S&P 500 likely will soon dip into its own bear market. However, does history support this idea? No.
The S&P 500, since 1980, followed small stocks into bear territory just half the time. Though small and large cap stocks are extremely correlated, just because small caps now have declined into a bear market does not mean large caps will, as well.