Prepare for the “V”

Matthew Unger |

Prepare for the “V”

Unless you live in an area without access to the internet or cable TV, you have probably heard about the recent rout in equity markets. If not, welcome to the "correction" party. The S&P 500 was off to a modest start this year, peaking at 3,390.78 on February 19th. As we had mentioned in our 2020 Forecast, we expected volatility to resurface after nearly 5 months of low-to-no volatility. The next days that followed saw markets shave 10%+ off their all-time highs, and at the time of this writing are down another 2%+. This only reaffirms our bullishness, and gives us more belief that this is not a bear market. Bear markets don't announce themselves like corrections do. Bear markets are more sinister, and start with a rolling (read: boring) top.

It never feels good to look at your account and see a major decline in value. While this likely isn’t a bear market, corrections on average are market downdrafts of 13.7% in equity markets from their all-time high. Corrections happen for any reason and no reason at all. They are often driven entirely by sentiment (read: uncertainty/panic), and decline for an average 4 months followed by a recovery of about the same duration. While this correction sets a new record: the fastest drop below 10% in equity market history, this is really nothing but a talking point for the media, and will have no bearing on how quickly or how long markets will take to recover. Think weeks-to-months for new all-time highs, not like months-to-years for bear market recoveries. The media loves to focus on point drops, not percentage point drops like savvy investors do, so I'm sure you have already heard of "The Worst Point Drop Ever" and other "Worst/Record" headlines. After all, the DOW is owned by News Corp and does a great job selling headlines. Side note: while writing this article, the NASDAQ went positive and is now down 1.5% - it took about 10 minutes to do that. If that isn’t the definition of volatility, then I need to re-learn volatility.

Like many corrections before us, there is often one inevitability. The “V” shaped bottom. There are other recovery patterns as well, W, U, and even L patterns. But for the purpose of this article we will focus on the “V”. A “V” pattern recovery is a sharp downdraft followed by a near-or-equally dramatic bounce to the upside off the bottom. If history is any guide, it’s almost an absolute to expect one in the future, and has occurred frequently. The correction of 2018, 2015/16, 2012 and the two corrections of 2011 featured these types of bottoming patterns…just to name a few.

Another thing to remember is that the stock market is not the economy. It is a leading indicator of the economy, as markets are forward looking. Expect 2020 to be another good-to-great year in the markets, and stay invested. Also, don’t look at the DOW, watch the S&P 500. Better yet, turn your TV off.