On Christmas eve, the S&P 500 lost 2%. By itself it would have been an uncommon event, if weren’t for the fact that year-to-date, it would be down by over 12%. It is also almost 20% down from its peak in September. Everyone was wondering if Santa has neglected the stock market investors this year.
On the next trading day, it sharply reversed course and rose over 4%. There was a sigh of relief as evident from the financial news.
It’s easy to be lost in the volatility of the financial news. Look too close at the stock market and you would think that you are watching a schizophrenia determining the prices of stocks.
But if you zoom out and look at the longer trend you will realise that there are only 5 times in 20 years that we are in a similar situation. Below is a chart of the S&P 500. Currently the S&P 500 is touching its 200-week moving average price (the purple line).
The last time this occurred was in early 2016 when the oil price was at its lowest point after a fall that started in August 2014. Brent oil was around $30/barrel at that point and the oil & gas industry was deeply affected. China’s Shanghai Composite Index was also at its lowest point. It had dropped almost 50% from its peak just 7 months ago. These two extreme events pushed the S&P 500 to its 200-week moving average.
Before 2016, we had the drop in August 2011. This was when the S&P ratings agency (which is unrelated to the S&P 500 index) did the unthinkable and downgraded the US sovereign rating from AAA (totally risk free) to AA+ for the first time in history. This historic event led to the S&P 500 touching again the 200-week moving average.
Peeling back time, we are in June 2008 when the S&P 500 index would again break below the 200-week moving average. This was the Global Financial Crisis. We know how that was like.
And finally the 5th time it has occurred in 20 years was back in March 2001 after a period of decline starting in August 2000. This was the period sparked by the bursting of the dot-com bubble. The US Nasdaq index had plunged over 60% by that time.
What does this tell us? We should be in the time of the extremes again. But unlike the 4 times earlier there is no extreme stress to the system other than the hikes of US federal interest rates. But even that is within the long term expectation for interest rates.
There is expectation of slower global growth caused by the US-China trade war but I would not characterise that as an extreme event.
But what is clear is that this is either the best time to buy into stocks or the start of something much worse. It would be wise to start nibbling into indexes by buying into diversified ETFs. In the event that it gets worse, then slowly average down your purchase cost to take advantage of the future upside.