A Bull Market Sell-Off

We wrote last week that the US stock market was on its longest run without a daily 2% decline since 1954. After today, we can officially call an end to that streak. Equity markets sold-off across the globe on Tuesday. The S&P 500 fell 3.4% and the MSCI World Index nearly 2.5%. The media attributed the brutal day to a sharp decline in mainland Chinese equities, a drop in US durable goods orders and recent comments from Alan Greenspan about a possible US recession. But none of these events is enough by itself to instigate a decline like we saw today. It may have been a long time since we had a down day this big, but it's no reason to start panicking now.

Today's events had all the characteristics of a classic market correction—prices fell abruptly on no significant news. Corrections are inherently psychological. Perhaps the doomsday prognostications finally tipped investors over the edge into a selling fury. Who knows. But this is not the stuff of new bear markets, which, in our experience tend to roll over gently and quietly before gaining momentum. Bull markets die with a whimper, not a bang.

Corrections are normal, healthy things for bull markets. From the end of 1987 through the market peak in March 2000, the S&P 500 suffered a 3% daily decline on 14 occasions. The MSCI World had it happen 8 times. The average annualized price return over the entire period for these two indexes was 16.8% and 11.4%, respectively. So, keep things in perspective. Today's movement is nothing to fret over amidst a larger bull market trend.

Besides, bear markets only begin when fundamentals are negative and sentiment euphoric. The fundamental factors of this bull market remain intact: global economic growth remains stronger than appreciated; corporate earnings continue to blow through expectations; earnings yield are much higher than bond yields; merger and acquisition and stock buyback waves are surging; and we are in the third year of a US presidential term, traditionally the sweetest year for equities in the election cycle.

Despite what you may read, we are not in the midst of euphoria. For that, think 1999, not 2007 where most professional forecasters are calling for only a high single-digit market return. Bull markets climb a wall of worry. Rest assured, this one still has legs.