Is A Big Drop Near All-Time Highs A Warning Sign?

Last Wednesday (May 17), the S&P 500 Index fell 1.8%, for the largest one-day drop since September (-2.5%). The loss also ended a streak of 15 consecutive days without the S&P 500 closing up or down 0.5% or more, the longest since 1969. On Thursday and Friday (May 18-19) equities bounced back, but the big question remains: Is a big drop near all-time highs a warning sign?

Per Ryan Detrick, Senior Market Strategist, “The big drop on Wednesday was a harsh reminder that markets can indeed be volatile, as the recent historic lack of action has lulled many into forgetting how volatile markets can be. Here’s the good news: historically, large drops that take place near all-time highs have done little to slow bull markets.”

Since 1950*, there have been 13 other times when the S&P 500 was within 0.5% of an all-time high and it dropped at least 1.8% (like Wednesday). As the chart below shows, the returns one, three, and six months later have been stronger than the at-any-time returns. Additionally, six months later the index has been higher all five times going back 20 years. In other words, Wednesday’s was a big move that woke up many investors, but longer-term it likely doesn’t mean much, and the bull market is still alive and well.

IMPORTANT DISCLOSURES

*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

The economic forecasts set forth in the presentation may not develop as predicted.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

This research material has been prepared by LPL Financial LLC.

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