Market volatility continued in July with an overall trend to the upside. Small caps led the market upward and growth is outperforming value. The losses in the closing days of June were recouped in July with some to spare. With the action in August, the S&P 500 Index is approaching its January highs.
The Federal Reserve Board met on July 31 and announced the next day that members unanimously voted not to raise interest rates this month. After the increase in June, maintaining the status quo was anticipated. The Board acknowledged that the labor market continues to strengthen and economic activity is rising, giving credence to the expectation of another rate increase in September and possibly the fourth increase for 2018 in December.
We have long considered headlines to be a contrarian indicator. Here are just two published by Market Watch on July 31: “Prepare for the biggest stock-market selloff in months, Morgan Stanley warns.” And “This ‘prophet of doom’ predicts stock market will plunge more than 50%.” Sensational headlines sell air time and right now everyone wants to know when the market is going to turn down. Just remember that no one can predict the future with certainty.
The headline waiting to happen on August 22nd is the declaration that we are now in the longest bull market in history. This is based on a start date of March of 2009. Is that an accurate assessment? A bear market is defined as a drop of at least 20% in the S&P 500 based on the daily closing prices. In 2011 this index declined over 20% based on intra-day numbers in a six month period. When you look only at the closing numbers it did not quite hit -20% but came just short at -19% and change. Had that drop been recognized, it would have started the clock ticking all over again in 2011 and this would not be the longest bull market in history.
There was a lot of mayhem in the markets in 2015 so was that a bear market? The price of oil dropped from $112 to $26 a barrel from 2013 to February of 2016. The stock market simultaneously bottomed in February 2016. Many individual stocks declined more than 25% from May of 2015 to February 2016. There was definitely a bear market in small caps and international in 2015. The small cap sector corrected 26% and the international markets declined by 27%. Technically the S&P 500 Index dropped only 16% based on daily closing prices so a bear market was not declared.
Beware of headlines; they may not always be what you think. It is futile to try to predict the end of a bull market. That can only be done with hindsight. There are a lot of variables and there is no one today who can tell you when this bull market is going to turn into a bear. In other words, don’t run ahead of the market. Watch the indicators and change when the market changes. Don’t base investment decisions on pundits’ predictions. As of this writing the signals are still bullish.