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Although US stocks remain strongly up from lows a year ago, recapturing previous market peaks is nowhere on the near-term horizon. The combination of heightened geopolitical risks, uncertainty about inflation and interest rates, and ongoing political dysfunction in Washington provide compelling reasons for investors to adopt a wait-and-see posture.
The rally from last year’s lows ebbed over the summer and the market has been falling ever since. It’s a slow grind lower, leaving room for the bulls and bears to appreciate their respective views.
Despite past gains, shares remain down significantly from the market’s January 2022 peak. The current peak-to-trough decline for the S&P 500 index is -10%. This is a big improvement from last year’s trough, which at one point reached -25%.
The current decline is the ninth longest on record since 1950. At this point in history, many sharp declines were on the verge of recapturing their previous peaks. But there is also precedent for very long-term decline. The three longest periods ranged from 1,376 trading days (2007–2009) to nearly 1,900 (1973–1974). This is a reminder that the current 451-day decline may be the opening bid into an extended period of trading below the previous peak.
It is encouraging to recognize that after a huge decline, the recovery is continuing, even with the risk of temporary setbacks. For perspective on how bad it could get, the decline of 1973–1974 is a guide. Lasting 1,898 trading days, it is the longest since 1950. It is also the poster child for slow reform in modern history. In mid-1975, when the market seemed to be on its way to recovery, declines of around -20% resumed, falling to more than -30% before regaining hold.
This was followed by a setback in 1976 that marked the beginning of a nearly 2-year comeback – a massive decline within a decline.
The good news is that despite the setbacks, the broad trend after the extreme downturn point is of improvement, albeit in fits and starts. This suggests that the current decline will follow the historical pattern and the repair and recovery will persist. The secret is of time.
My guess is that the market will fluctuate in the near future, depending on the headlines of the two magazines. At some point, when the news cycle is a little kinder and milder, the market will make a clear attempt to recapture the previous peak. But right now, given the day’s news and recovery history, I’m not holding my breath.
editor’s Note: The summary bullets for this article were selected by Seeking Alpha editors.