S&P 500 Down 10% from 52-Week High – Time to Panic?

Global stocks are coming off one of their worst weeks of the year. No doubt investors are a bit nervous.

Today – I am going to explain whats is happening, what I expect in the next two months and how to proceed.

In the US the S&P 500 (SPY) fell 3.9% last week and entered a correction – down 10% or more from the 52-week high.

Vanguard Global Stock Market (VT) fell 3.6% and also entered a correction.

Emerging Markets (EEM) fell 2.6% and also entered a correction.

Take a look at the recent weakness in the chart below.

Why are Global Stocks Weak all the Sudden?

This recent weakness is being driven by a few factors.

#1 profit taking: Global stocks are up huge in the last two years. For example, before this sell off the S&P 500 was up 42% in two years. Even after the decline the S&P 500 is still up 29%. Shorter-term traders and investors are taking some profit off the the table after an awesome two-year run.

#2 interest rates just hit a new 6-year high: Interest rates have been spiking and just hit a new 6-year high.

This is a head wind because rising interest rates restrict the flow of capital into the stock market.

#3 wall street is nervous about the midterms: Markets always get nervous about political event and we’ve got a big one less than 1- days away with the US midterms.

#4 pace of global economic growth is slowing: In 2018 the global and US economies are growing at their fastest pace in ten years. 2019 should be another solid year of growth but just not as fast as 2018.

What this all means is that the global stock market is currently pricing in some short-term headwinds and some slightly slower economic growth in the long run.

Here’s the Good News – This is all Pretty Normal – Do Not Panic

I know this pullback has been painful. But this is actually pretty normal movement in the stock market. And I still see more reasons to be optimistic than pessimistic.

#1 pullbacks are a normal part of a healthy market: According to a study from mutual fund company American Funds, from 1900 to December of 2014, a pullback of 10% or more happened about once every year. Bear markets (more than a 20% decline) are rare, happening only once every 3.5 years.

#2 global and US economies are still strong: Global economic growth is slowing from 2018. However, the pace of growth should still be strong in 2019.

The Organisation for Economic Co-operation and Development on Thursday slightly lowered its projections for global economic growth this year and next, saying the expansion “may have now peaked.”

The world’s gross domestic product is expected to expand a real 3.7 percent in 2018, down from the 3.8 percent forecast in May, the OECD said in its interim economic outlook report.

GDP is seen expanding 3.7 percent in 2019, rather than the previous estimate of 3.9 percent.

3.7% GDP growth would be completely awesome and still among the best in the last decade. So even though the pace of growth is slowing, the global economy is still expanding nicely.

#3 corporate earnings will expand in 2019: 2018 was a record year for S&P 500 earnings growth. The pace of earnings growth will slow in 2019 but should still expand at a solid clip and hit a new all-time high every quarter.

#4 US stocks are entering the best six months of the year: The months from November through May are seasonally the best six months of the year for US stocks.

More specifically, November, December and January are historically three of the best months for the stock market.

Take a look below.

#5 The S&P 500 is the most over sold in two years: The Relative Strength Index (circled in red below the chart), a measure of over bough and over sold conditions in the stock market, shows that the S&P 500 is at its most oversold level in two years and looks extended on the down side. This tells me at the very least we should see some kind of relief rally.

#6 the trend is still higher in global and US stocks: US stocks are still in a bull market and the longer term trend is still higher.

What Should we Expect Looking Forward?

I don’t think this is the beginning of a big meltdown. I don’t see global stocks crashing again like they did in 2008. I don’t see the global economy falling apart either.

I am expecting to see more volatility in the short run. But beyond that I am still optimistic and bullish.

I am expecting stocks to get a short-term pop once we move past the midterms. That will remove a lot of uncertainty from the market. Past the midterms we are moving into a seasonally strong time of the year for US stocks.

I expect the S&P 500 to recover and close the year back at the all-time high.

Long-term investors 5+ Years: continue making monthly contributions to your retirement accounts. Use these periods of weakness as a chance to buy lower.

Short-term investors: if you think you’ll need your cash in less than 2-3 years and this volatility makes you nervous, think about reducing your exposure to stocks and increasing allocation to bonds and cash.

Quick Update on Cannabis Stocks

Weakness in the broader stock market has been weighing on the cannabis sector.

The North American cannabis index is in a bear market – down about 28% from the 52-week high.

Despite the weakness don’t panic. The cannabis industry is looking better than ever and I still see plenty of upside.

I’ll be back later this week to share more details on the cannabis sector.

In the meantime have a great week.