S&P 500 Index: Prepare for a Pullback? Or, Party Like its 1995?

2017 has been an extraordinary year for the S&P 500 Index thus far in terms of its lack of volatility and pullbacks. This has many wondering whether the bullish trend can continue; however, price action closely resembles 1995―which marked the beginning of a multi-year bullish trend for stocks.  So are equities setting up for a larger pullback and increased volatility, or should we party like it’s 1995?

Looking at historical data going back to 1950; a majority of the pullbacks in the S&P 500 have been in the -3 to -10% range (Figures 1 & 2), occurring 314 times with average and median returns of -5.6% and -5.4%, respectively.  Though pullbacks of more than 15% occurred just 20 times during this time period, the average and median returns of -24.6 and -23.6, respectively, suggest that when equities fell more than 15% they were likely to continue below the 20% threshold into what many technicians may identify as a bear market.

So far this year, the index has generated five shallow pullbacks with an average return of -2.0%, which is better than the long-term average of -5.6%; and according to statistics, that increases the likelihood for a reversion to the mean scenario and increased volatility.  However, comparing annual statistics for pullbacks and volatility, this year closely resembles 1995, which began a multi-year bullish trend for stocks (Figure 1).

Can the market continue to operate in a series of shallow pullbacks?  Statistics suggest a pullback of more than 2% before the end of the year is likely; however, one way to interpret the data is if in fact current trend conditions are like that of 1995, and the long-term bull market continues to be robust, then any short-term weakness in stocks may present an opportunity to buy on a dip.



*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.

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