The 2 charts below, which look at the S&P500 on an OHLC and closing basis are at least reasonable evidence for considering a longer and deeper decline. Given that, TPA has analyzed 5 large market declines in the past 20 years. These declines watched the S&P 500 drop from 19.3% to 56.7%. Each decline saw the U.S. Year over Year GDP decline (a range of -6% to -227%). TPA has gone through this exercise to lay out the most probable road map should the decline of 2% in the past 5 days turn into something more serious.
TPA examines the duration of the declines, because this says something about the U.S. economic system and what can be expected in the face of future declines.
TPA’s analysis also looks at the 5 market declines in the past 20 years by sector, broad-based categories, and by subsectors. TPA ranks the performance in each period, averages the 5 periods, and determines percentage of times that each part of the market outperformed the S&P500. TPA assumes that there is a greater probability than not that these patterns will repeat to some extent.
1. Duration of declines
The duration of declines has been decreasing steadily over the past 20 years. The 5 decline periods have been 929 days, 517 days, 157 days, 95 days, and 33 days. This has not been due to a lower severity of the economic shocks for each period. The table below shows that there is no obvious relationship between the GDP decline and the duration of the decline. In fact, the most recent decline period, due to Covid-19, was the second-worst GDP drop. TPA believes that the shorter decline periods have more to do with the FED reinforcing its willingness to defend the stock market with each decline. After 20 years, investors have no doubt that the FED will step in each time the market drops. They have learned that it is not a matter of whether or not to buy, but WHEN to buy. FOMO has sped up the stock price recovery process.
2. Combination of performance rank and percent outperformance
If the recent drop in stock prices turns into a more sustained decline, history tells clients where they should position themselves during the decline. Of course, the duration pattern shows that investors need to be adroit to take advantage of the decline pattern.
In the table below, TPA has highlighted areas of the market with consistently high-performance rank and patterns of outperformance. These are places where clients should be during a decline. On the flip side, TPA has highlighted areas that consistently rank low and underperform during steep market declines. These are areas that clients should avoid if the recent decline turns more serious.
High rank and consistent outperformance:
· Sectors: Consumer Staples & Healthcare
· Broad Market: Large-cap growth and Large-cap value
· Subsectors: Gold, Household Products, Packaged Food, Pharma, Biotech, General Merchandise
Low rank and consistent underperformance:
· Sectors: Materials, Financials, Industrials
· Broad Market: Small-Cap Growth, Mid-Cap Growth
· Subsectors: Airlines, SEMIs. Investment Banks, O&G Drillers, O&G Service, Regional Banks,
Auto Parts
