- The question for stocks in 2019 isn’t whether earnings will slow, it’s by how much.
- During such slowdowns, the evidence shows that not all stocks are equal.
- Tilting towards more defensive stocks during earnings slowdowns can be beneficial to one’s portfolio.
One asset class has rebounded to new all-time highs — U.S. small cap stocks.
After a bullish 2017 and hopes of a continued global equity melt up, 2018 has instead reintroduced market volatility. Despite global market volatility, U.S. small cap stocks have rebounded to new all-time highs.
Factors influencing the success of U.S. small cap stocks
Beginning August 20th, the S&P 500 declined over 10% in 4 trading days. While a 10% drop is the unofficial definition of a typical correction, the speed at which the decline came was rare. In fact, since 1965 there have only been 5 other “events” that included a 10% correction in just 4 trading days: 1987, 1998, 2002, 2008, and 2011.
We examined those past events to see what we could learn. The accompanying chart shows the last 5 events 3 months before and 3 months after their 4-day drop. Our first takeaway?
In 4 of the 5 historical events, the S&P 500 showed gains 3 months later, while 1 event (2008) led to deeper losses. Last week, we heard many market pundits point to data like this to encourage investors that a rebound was likely.
“Given the big run that stocks have had, it’s probably a good time to sell.”
I recently heard this at a holiday party, but what struck me was how often I’ve heard the same thinking over the last 5 years … only with a different catalyst.
There seems to be plenty to worry about these days. Richard Bernstein Advisors recently published the latest list of fears.