2/27/20
Hello friends,
It’s not very common for me to send out a mass email. However, it’s even less common for the Dow Jones to drop 2,000 points in 3 days (it’s never happened). Therefore, I wanted to take the chance to share some facts and a few opinions.
The ~1900 point two day (Monday & Tuesday) drop equated to a 6.3% pullback. Two day pullbacks of 6% or more have happened 8 times since 1997. One month later, the market was higher 7 out of those 8 times. The only time it failed to trade higher was 2008 (financial crisis).
Since the low of 2009, the S&P has seen 26 pullbacks of 5% or more. Which are always led by a scary headline (Trade war, election, Brexit, Ebola, etc). With the average being a drawdown of 7.9% (we are currently at 8.4%).
New home sales and building permits just hit a 13 year high. Retail sales recently hit an all time high. These are not indicative of an economy going into a recession.
Recession’s happen on average every 7 years. We are currently on year 11 without one. The typical recession results in a 20%+ drop in the market. However, without a recession, the market still saw a 20% drop at the end of 2018. This in my opinion hit the reset button on the market and bought us more runway.
The market was trading at an all time high last week and was looking for a reason to take a break. The virus was/is the perfect excuse to sell stocks. It’s scary and seems like it could stall the global economy. However, as mentioned before, we get headlines 2-3x a year that seem like the global economy is on the rocks. In spite of the headlines, economic data and fixed income markets tell a different story.
These kind of pullbacks are only a bad thing if you have to sell. On the other hand, if you don’t have to sell I highly suggest holding tight or buying this drop. The pullback may deepen, but history shows a month from now we will most likely be higher. There’s no question a recession will come at some point and a ~20% drop will most likely occur as a result, but I think new highs will be made in the meantime.
Regards,
JC
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