Winning Streak Ends

S&P 500 Chart

The S&P 500 just did something that is hasn’t done in 15 months - it went down. February’s - 3.6% return was the first monthly decline since October 2016, marking the end of the longest monthly winning streak in the history of the index. The previous record streak was a 10-month period during the roaring 90s.

Is February’s decline something we should be concerned about? Probably not. February’s -3.6% came on the heels of a very strong 5.7% gain in January. And, as I’ve written about repeatedly, the market was long-overdue for a pullback. Technically speaking, investor sentiment had reached incredibly high levels - investor surveys during the month of January recorded all-time highs, indicating their thinking that the markets would move even higher. As contrarian thinkers, we knew that was the perfect recipe for an incipient market reversal.

The market reaction was fierce, equities quickly moving from overbought to oversold in a matter of days. But on February 9th, 2 weeks into the carnage, markets started recovering. This was the fifth correction (defined as a 10% decline) of this bull market. Although unpleasant to go through, corrections are actually rather healthy for the markets. They remove some of the speculative froth in the system when expectations get too high. More significantly, corrections don’t always signal doom and gloom ahead. In fact, less than half of all corrections lead to a bear market (defined as a 20% decline). It’s even more rare when the economy is not in a recession, which we are not in today. Of the 10 bear markets since the Great Depression, only 2 occurred without a recession.

Volatility may not be over. Markets certainly can retest the lows they touched on February 9th. They may even go through those lows. However, during times when the U.S. economy is experiencing growth, such as we currently are, history shows market pullbacks are more shallower and shorter, before the markets then climb to new highs.