Opinion: Why the S&P 500 Could Gain Another 10% from its Previous High
U.S. stock market often moves higher after overcoming a correction
It’s official: The U.S. stock market’s early-2018 correction has now been completely erased.
That doesn’t resolve all issues facing investors, of course. The future remains just as unknowable as before. But the market’s latest achievement does mean that we can no longer debate whether the January stock market highs represented the end of the bull market.
It most certainly did not. Someone who invested a lump sum in the stock market on Jan. 26 — the date of the early-2018 high — is now in the black. (This as judged by the dividend-adjusted Wilshire 5000 index, which represents the combined market cap of all publicly-traded stocks — see chart, below.)
July 25 was the day on which the dividend-adjusted Wilshire 5000 index eclipsed its previous high, which means that the stock market spent six months in the purgatory of not knowing whether a new bear market had started.
Counting from the Feb. 8 correction low, the stock market’s recovery time was five and one-half months. According to CFRA strategist Sam Stovall, this is only slightly longer than the five-month average recovery time of all corrections since World War II.
The early-2018 correction and subsequent recovery were entirely average.
The bottom line, therefore: The early-2018 correction and subsequent recovery were entirely average. That’s something to think about in light of the huge amount of ink spilled over the last six months about what might have caused the market’s pullback and what it meant for the future. Was it just a lot of sound and fury signifying nothing?
One mild surprise is that the market-timing community has been slow to jump back on the bullish bandwagon. This is encouraging from a contrarian point of view, suggesting that there is a healthy level of skepticism out there about the market’s rally.
After all, the normal pattern is for bullish sentiment to rise and fall more or less in lockstep with the market itself. So, other things being equal, we’d expect to see bullish sentiment over the last week to have risen to the same level it was at the January highs.
It’s not, as I outlined in my column last week. That’s why, as I reported in that column, the bull market has, at a minimum, a short-term lease on life.
The market often, though not always, continues higher after overcoming a correction.
How much higher can we expect the market to rise, now that it has overcome the last-six-months’ correction? Contrarian analysis doesn’t offer any insight, since it instead recommends that we instead let the sentiment indices tell their story as it unfolds. But Stovall says that the market often, though not always, continues higher after overcoming a correction.
“Encouragingly,” he wrote recently to clients, “History says, but does not guarantee, that the S&P 500 SPX could advance another 10% beyond the prior high before slipping into another decline of 5% or more.”