As we have traveled around the country in recent weeks, the most frequently asked question is whether the current bull market has come to an end. We think the answer is no - while we may have seen both peak economic and earnings growth, an economic recession does not seem likely in the near term and profits look set to continue growing next year, albeit at a slower pace. Furthermore, as the Federal Reserve continues to unwind the greatest monetary policy experiment seen in our lifetime and other central banks hint that they will follow suit, it should not be surprising that risk assets have come under pressure.
Times like these require a bit of an iron stomach, and a little bit of perspective. As we show on page 14 of the Guide to the Markets, the S&P 500 has fallen by an average of 14% each year over the past 38 years. However, in 29 of those 38 years, the stock market finishes the year in positive territory. Accommodative central bank policies have dampened volatility over the course of this cycle - frankly, this is not normal. However, as shown in the chart below, 5% pullbacks are actually quite normal, reminding us that even in years where market returns are stellar, there can be rolling waves of volatility.
While markets rise and fall over the course of a cycle, the biggest pullbacks tend to come when an economic recession comes into view. With fiscal stimulus continuing to boost growth through the middle of next year, we are not at that juncture, at least not yet. Additionally, it is important to remember that over the past 20 years, the 10 best days have occurred within two weeks of the 10 worst days. In 2015, the best day for the market (August 26) occurred just two days after the worst day (August 24). Jumping ship when the outlook is bleakest is often the wrong decision.
Finally, taking a long-term view is important. Over short periods of time, markets can move up, down, or side to side. Over the long-run however, markets tend to move higher. This recent bout of volatility should not serve as a reason to get out of stocks, but rather to have a conversation about asset allocation. If investors have a plan and stick to that plan, the ride tends to be more comfortable, and when the ride is more comfortable, it becomes easier to stay invested.
Moderate pullbacks happen frequently, even in normal times
Number of 5% pullbacks in the S&P 500 experienced per year
Source: Standard & Poor's, FactSet, J.P. Morgan Asset Management. For Illustrative purposes only. Returns are based on price index only and do not include dividends. Data are as of 10/24/2018.