Questions About The Fear Of 20% S&P 500 Corrections

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For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary:

A funny thing happened on Friday, May 20 – the “Fear of 20” kicked in once again. The S&P closed the day before at 3,900.79, down 18.7% from its peak close on January 3, 2022 (at 4,796.56). On Friday, May 20, the S&P 500 opened down sharply (-2.3%) to 3,810, which marked a 20.56% decline from its peak, the definition of a “bear market,” a 20+% decline – on a closing basis (not intra-day) – on the S&P 500.

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Surviving The Curse Of The 20% S&P 500 Correction

Traders must have looked at each other and said, “Not on my watch!” The market turned on a dime, and it closed up a fraction of a point, at 3,901.36, so we survived the “curse of the 20% S&P 500 correction” once again. (All in all, the S&P 500 flirted with a 19% to 20% decline on four days – May 12th, 19th, 20th, and 24th.)

Ironically, the Super-bear Jeremy Grantham cited that 20% decline the day before, May 18, when he told CNBC: “The other day [May 12], we were down 19.9% on the S&P 500, and about 27% on the Nasdaq. At a minimum, we are likely to do twice that. If we’re unlucky—which is quite possible—we would do three legs like that.” By citing “three legs,” Grantham implied an 80% decline from the peak due to seeing the worst of the three deepest bear markets of the last 50 years, all at once – the worst of the Tech Wreck of 2000-02, the worst of the housing bust of 2008, and the worst of the decade-long stagflation of the 1970s. That kind of vision takes a combination of a ghoulish imagination and some clinical depression.

Instead, I’d look at the 20% bear market threshold he cited. Since 1990, we have dodged a bear market in five of the eight times the S&P 500 came within a fraction of a 20% correction. Only three times did we tip over into a bear market over 20%, and they each ran over 30% (2000-2, 2008-9, and the 2020 COVID crash). It’s almost like traders fear a crash so much that they try to avoid a 20% downdraft “at all costs.”

Consider these instances in which the S&P 500 dipped below 20% intra-day, but closed short of -20%:

S&P 500 Correction

A bear market is traditionally defined as a 20% decline in the S&P 500 closing, but in 2022 that index once again refused to fall 20% on a closing basis, although it has declined over 19% on an intra-day basis four times already. It’s almost like savvy traders don’t want to see that “red line” crossed, so they rally and buy as the 20% decline level approaches, as it did on Friday, May 20, and again last Tuesday, May 24.

NASDAQ is Another Animal – Up More, Down More

NASDAQ is in a bear market for sure, but don’t forget that it is still up 795% since the start of the long-term bull market in 2009, so we’re likely seeing an overdue “reversion to the mean” in that index. In the same time period, the S&P 500 is up just 468%, so it didn’t earn as much mean reversion as NASDAQ.

Behold NASDAQ’s “brutal bear market” in context (it’s the little dip in the upper right-hand corner).

S&P 500 Correction

20 Questions About the 20% Bear Market Barrier

In the only three bear markets of the 21st Century: (1) The dot-com bubble of 2000, (2) the real-estate bubble and financial crisis of 2008, and (3) the brutal onset of COVID in 2020, ask yourself these 20 questions about the current situation, boiling down to one question: Ask yourself if this is a bear market.

  1. Is a bear market (like 2000-02, 2008-9, or 2020) justified by today’s fundamentals?
  2. Specifically, is today’s NASDAQ dominated by no-earnings “bubble” stocks, as in 2000?
  3. Or are “zombie banks” failing by the dozens each year, as in 2008 through 2013?
  4. Are real estate loans being bundled into AAA shell securities, as in 2005-08?
  5. Is COVID at the beginning, or near its end? (Is the U.S. economy still locked down?)
  6. Are people being laid off with no jobs available, as in a real recession?
  7. Will most workers probably come back to work once they run out of money?
  8. Will technology products and services become more (or less) important in the future?
  9. Will supply disruptions be solved over time, or will they last forever?
  10. Are we really headed for a recession, as long as GDP growth remains around +2% this quarter?
  11. Are we likely to see more political balance in Congress after the 2020 mid-term elections?
  12. Will the resulting “gridlock” (from a more balanced Congress) be good or bad for stocks?
  13. Is the third year of an election cycle good for stocks (like 1995, 1999, 2003, 2007, 2011, 2015, or 2019)?
  14. Is the U.S. still #1 for currency, stock market, economy – and refugee destination?
  15. Does the S&P 500 still deliver more income than most bonds or bank savings accounts?
  16. Have stocks ultimately grown through all past recessions – from the 1950s onward?
  17. With QE ending, QT starting, and interest rates rising, isn’t it likely that inflation will peak this year?
  18. Are people freer to act, move, think, and speak in the U.S. than in China, Europe, or even Australia?
  19. When people work from their homes and commute less, aren’t energy (and other) costs lower?
  20. If traders fear crossing the 20% correction barrier on the S&P 500, isn’t that sort of a “floor”?

Happy trading in June.