A Sharp Pullback

In my previous letters, while commenting on strong and consistent market returns over the last few years, I noted that such performance is hard to maintain and that a correction is inevitable. And that is exactly what he had this quarter. From the top, S&P 500 dropped nearly 20%, a classic definition of a bear market.  In the last ten years, there were only two quarterly drops of similar magnitude: in Q4 2008 and in Q3 2011.

It is very painful to experience drawdowns like this, and in such situations it always helps to zoom out. For the full year, the market declined 6.2% for the year, still a loss, of course, but not so dramatic. Over the last 5 years, however, it climbed 36%.  And for the last 10 years, it is up by 178%. Obviously, sharp declines happen, but they are rare, and often forgotten in the overall context of the historical performance. So let’s see what happened in these two quarters I mentioned above.

In Q4 2008, we were in the midst of the banking crisis and the Great Recession. So at least one could argue such a loss was justified. However, I could not remember what caused the drop in Q3 2011, so I actually had to look up my own posts and to google historical facts. Then, as is the case today, the economy was doing well, companies had good earnings, and there was nothing present in fundamentals to warrant such a decline. What was present was a fear of European bank problems, and specifically the fear of Greek default. Remember PIIGS? Also, there was a government shutdown (sounds familiar?) that summer and S&P downgraded US debt a notch. That was good enough for the market to react the way it did. Market performance since then? 122% gain. Performance since Q4 2008? 178% gain.

I find issues in Q3 2011 quite similar to what we are experiencing today. The economy is strong, and companies are expected to continue growing earnings this year (although at a slower pace than in 2018). Global economy is projected to grow at the same rate as last year. But we have a lot of fears. Such as tariff wars and a possibility that they could cause a global slowdown, concerns that Fed is raising interest rates too quickly, that Brexit can hurt European economy, and apparent chaos at the White House. No one knows whether any of these fears materialize. However, we do know, looking back at market history, that every decline has been overcome by an inevitable advance to the new highs. If you have funds to invest, I would strongly suggest putting them to work in the market.