PMC Market Commentary: October 31, 2014
A Macro View – 2014 Market Pullback Reflections
The U.S. equity market rebounded significantly in recent weeks with the S&P 500 Index recouping almost all of the lost ground during the most recent market pullback started in mid-September. As of the close of business on October 30, 2014, the S&P 500 Index had a year-to-date total return of +9.7%, within just striking distance of its all-time high. As 2014 is winding down with the seasonally-strong months of November and December remaining, the S&P 500 Index is poised for a potential double-digit-gain for the year.
The U.S. equity market has been resilient in 2014, with the S&P 500 Index shaking off four major market pullbacks. At the beginning of the year, concerns about emerging markets (“emerging market scare”) caused the first market pullback in 2014; in April, worries about excessive valuation of social media and biotech stocks (“social media/biotech scare”) dragged the index down by nearly 5% in only a week; during late July and early August, concerns about a potential escalation of the conflict between Russia and Ukraine (“Russian/Ukraine scare”) rattled the market once again; last but certainly not least, the recent plunge due to global growth worries (“global growth scare”) caused the S&P 500 Index to tumble as much as 9.8%, just shy of the 10% mark generally considered as the threshold of market correction.
All market pullbacks in 2014 did not last long, though, ranging from 7 to 26 days. While the short duration of market pullbacks makes it easier for buy-and-holders to stick around, this type of quick-in-quick-out market downturns is difficult to time for tactical investors such as most hedge funds. The quick and sharp change in market directions is difficult even for the most nimble investors. For example, to successfully take advantage of the April “social media/biotech scare”, you have to be correct – not once, but twice – within a short seven-day span.
During these downturns, there was much talk among market pundits about the 10% correction mark. The suspicion is that the market has not had a 10%-plus pullback for a while and thus is due for one imminently. It is true that the last 10%-plus drawdown of the S&P 500 Index occurred as far back as April – June of 2012, but there is nothing magic about the 10% mark. The theory is that once the market drops 10% to reach the so-called correction territory, it will go down further and thus it is scary. Really? Look at what happened after the last 10%-plus fall, and you can conclude that this 10% anxiety is a bit far-fetched. After the S&P 500 Index experienced the 10% sell-off in 2012, it declined only 0.9% and then bounced back with a vengeance. The most-recent pullback (“the global growth scare”) was the severest since then with a peak-to-trough loss of 9.8%. If we have to worry about lack of market correction, this one is as good as it gets. Just because it is 0.2% shy of the 10% mark and thus “disqualifying” it as a legitimate market correction is not valid.
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