What Now?

Sunday, February 11, 2018

Dear Friends,


The facts:

  • From peak-to-trough, we just experienced a 10+% drawdown.

  • As of Friday’s close, the S&P 500 index is -8.8% below its 52-week high, +13.9% above its 52-week low

  • The high was January 26, 2018

  • The low, so far in this correction, was February 9, 2018

  • The correction has lasted, so far, 10 trading days

Market correction history:

  • There have been 16 drawdowns of 10%+ in the past 42 years since 1976, about 1 every 2.5 years; so they are fairly common

  • Of the 16 corrections, only 5 occurred around a recession

  • Of the remaining 11 non-recession episodes, 1987 was the only one that turned into a bear market (i.e., a decline of 20+%)

For non-recession corrections since 1976, the S&P 500 index:

  • declined a median -15%

  • took a median 70 trading days (3.5 months) to trough

  • took a median 88 trading days (4.5 months) to recover

  • An investor who bought at -10% below the peak, without waiting for a bottom would have experienced median returns of:

  • +6% in 3-months

  • +12% in 6 months

  • +18% in 12 months

Probability of a recession

  • Of the bear markets since 1976, only 1 occurred without a recession – 1987

  • It’s important, as investors, to know what are the probabilities of recessions, since recessions are dangerous for stock markets, the median recession decline is -27%

  • I like the following economic model, which has been great for calculating the probability of recession:

  • Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., "An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, 1998, 39, 969-996. Click Here

  • Using that model, which lags 3 months due to data lags, the probability of a U.S. recession is very low, below 1%:

  • 0.46% November 2017

  • 0.00% October 2017

  • 0.08% September 2017

  • 0.16% August 2017

  • 0.32% July 2017

  • We monitor this recession probability model monthly, as it is released

What should you do?

  • Nothing, that is a decision

  • Dial back on your equities % you hold, call our office (800) 578-3181 Ext: 0

  • Buy the dip, increase your equities %, call our office (800) 578-3181 Ext: 0

Remember, there is no person or firm who knows where this market is going, especially in the short-term.

Chart of recession probabilities since 1976 - Shaded areas are actual recessions. Solid line is probability of a recession

Source: Click Here

Source of Exhibits 1 and 2: FactSet Research, Goldman Sachs Global Investment Research

Founded in 1992, Jackson Wealth Management is an independent, fee-only investment advisor. Founder George P. Jackson has been the CEO/CIO of the firm since its inception with the goal of delivering value to his clients and his associates. 

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