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.

 

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.

Indexes 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 Chicago Board Options Exchange Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.

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.

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