The S&P 500 registered yet another all-time high* on Friday. The global stock market, which includes both US and international equities, is following close behind at just 2.8% below setting a fresh record high. Many diversified portfolios—bolstered by bonds, which helped to offset recent equity losses—began registering fresh all-time highs weeks ago.
So what does this mean for investors? Let's walk through a few frequently asked questions:
Was that the long-awaited bear market?
With the S&P 500 falling -19.78% from September to December 2018, the stock market came very close to the 20% peak-to-trough drop that defines a bear market. But now that stocks have registered another all-time high, we can now officially label this most recent drawdown as a "bull market correction" (see Fig. 1), defined as a drop of more than 10% but less than 20%. In other words, this is still the same old bull market.
What should I do now?
It's probably a good idea to rebalance your portfolio, given the size of the recent market moves, but to be honest it's common for markets to set another all-time high, so it's not an event that merits a lot of action. It's probably more important to use this recent episode as a rare and valuable opportunity to evaluate whether your portfolio and your financial plan are resilient to uncertainty. After all, there's no substitute for experience. So now that your portfolio has recovered most or all of its losses, this is an excellent time to "make hay while the sun is shining, but also fix the roof." Please see the "what's next?" section of Learning from the last bull market correction for some helpful tips on how to take these lessons to heart.
Does this mean that investors face limited upside from here?
Probably not. As we stress in the Bear market guidebook, stocks commonly set all-time highs, and that goes double for diversified portfolios. Moreover, it's important not to confuse all-time highs with market peaks. By definition, all bull markets end at an all-time high, but only a tiny fraction of record highs will ever be an actual bull market peak. Please read Another all-time high. Time to stop adding to stocks? and The fallacy of "buy low, sell high" for additional data on why investors shouldn't fear all-time highs.
Looking at the average 12- and 24-month returns following the trough of past "bull market correction" episodes (see Fig. 1), we would expect the S&P 500 to rally to around 2950 by the end of 2019 and 3150 by the end of 2020. But of course returns are rarely average, and post-trough return ranges from -9% to +40.4% on a 12-month basis and from -16.8% to +98.1% on a 24-month basis.
Fig. 1: It's official: the recent sell-off was a "bull market correction," not the beginning of a bear market
Corrections in the S&P 500 greater than 10% but less than 20% (i.e., during a bull market)
* Technically, the index is still a few points short of the 20 September 2018 index level record (2930.75), but when you include dividends (why wouldn't you?) the market is at a fresh all-time high on a total return basis.
Author:
Justin Waring, Investment Strategist Americas, UBS Financial Services Inc. (UBS FS) David Lefkowitz, CFA, Sr. Equity Strategist Americas, UBS Financial Services Inc. (UBS FS)
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Appendix
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