Yesterday (August 10, 2017) was the second-worst day of the year for the S&P 500 Index at -1.45%. It was also the third drop of at least 1% this year, to go along with two gains of at least 1%. But since the February 2016 lows, markets have tended to bounce back quickly, as 10 of the 12 previous 1% drops were green the next day.
The big question is whether this could be the start of a more meaningful correction. Per Ryan Detrick, Senior Market Strategist, “Let’s look at the current situation. This is the longest streak without a 5% correction for the S&P 500 in 22 years, the second-longest streak ever without a 3% correction, small caps and transports are lagging, and seasonality won’t be doing anyone any favors for the next few months.”
The good news is that the global economy is robust; led by impressive global earnings growth, low inflation, a strong labor market, and accommodative central banks. In other words, should there be a more meaningful pullback, we wouldn’t expect a new bear market to start now, and it could be a nice opportunity to add to equity exposure.
But here’s the catch: years that end in the number “7” have tended to peak in August and move lower (sometimes significantly so) through the end of the year. Could 2017 see a big drop and no bounce? Here’s the average annual performance of the Dow since 1907 for the years ending in “7”:
Per Ryan Detrick, “Looking at the chart makes you want to hide under your desk when you see it, but remember this is only a sample size of 11, and the average performance is greatly skewed by big drops late in 1907, 1937, 1957, and 1987. Also, consider that 1907, 1937, and 1957 were all recessionary years, and equities had run up 40% for the year in August 1987, so a pullback was not surprising. Fortunately, we are not currently in a recession – nor do we believe one is imminent – and prices aren’t nearly as extended as they were in 1987 – all greatly lowering the odds of another ‘year 7’ major sell-off.”