Stocks Still Have Room to Run

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This “signal” kicked off Black Monday, the dot-com bubble, and the global financial crisis… And it just flashed again last month.

The S&P 500 Index officially fell into correction territory in late October. In other words, stocks dropped more than 10% from their July peak.

Buy-and-hold investors have watched their losses mount for months. And many believe the 2023 bull market is already over…

But history shows this 10% dip isn’t the end of the world. In fact, this kind of volatility is right in line with some of the best-returning years in stock market history.

Let me explain…

The S&P 500 rallied nearly 20% through July this year. Since then, though, stocks have been grinding lower. And investors are spooked…

We can see this sentiment shift using the Bank of America (“BofA”) Bull & Bear Indicator. This metric looks at a variety of sentiment markers – such as hedge-fund positioning, market breadth, and bond and equity cash flows.

Bank of America then boils all the data down to a reading from zero to 10. A score of less than 2 shows “extremely bearish” sentiment. And a score above 8 shows “extremely bullish” sentiment.

In October, this measure slid to 1.5… its lowest level since November 2022.

It’s not just BofA’s indicator, either. The recent American Association of Individual Investors (“AAII”) Sentiment Survey is in the dumps too…

This weekly measure asks individual investors about their market expectations for the next six months. Respondents must identify as either bullish, bearish, or neutral.

The October AAII bullish reading plunged 5 percentage points to just 29%. That’s well below its historic average of 38%.

Investors are bracing for the worst. But it might be too soon to sell out of stocks completely… because even in years when the market soars, corrections like these – or even worse – happen all the time.

To see this, I highlighted every year the market gained more than 20% going back to 1928. These were the absolute best years to be a stock investor. Then, I found the biggest drawdown for each year.

Over the last 95 years, there have been 26 in which stocks rose 20% or more. But many of these bull runs contained big drawdowns too. Take a look…

During these bull markets, the maximum drawdown was 11.6% on average. That means the 10% dip in 2023 is right in line with the average for the best-returning years ever.

Of course, stocks could fall further from here. But history shows it’s still too soon to give up on the market. Today’s extreme pessimism could even fuel a big rally to end the year.

A 10% drawdown is painful… but it isn’t a definitive bull market killer. Stocks still have room to run – so don’t let this correction shake you out of the market.

Good investing,

Sean Michael Cummings


This article was originally published on this site