Timely & Relevant News: How Markets Bottom
With US equities firmly in a bear market, even the most long-term investors are now looking ahead to when the selling may stop and where the S&P 500 Index might ultimately bottom. “Nobody knows exactly how this market bottom will play out,” said LPL Financial Senior Market Strategist Ryan Detrick. “However, using history as guide, we know markets tend to retest or even slightly break previous lows.”
We took a look at how markets have bottomed for two previous bear markets that show similarities to the current sell-off, in terms of speed and magnitude. As shown in the chart below, following Black Monday, the largest single-day decline in the history of the S&P 500, the index rebounded modestly, before undercutting its lows about six weeks later. However, a look at the bottom panel shows that the momentum, or speed, of that move was significantly less extreme and markets went on to rally, ultimately eclipsing the 1987 peak less than two years later.
The 2008-2009 financial crisis tells a similar story. While the S&P 500 Index didn’t ultimately reach its low until March 2009, most stocks actually bottomed during the fall 2008, following the collapse of Lehman Brothers. Even though the S&P 500 undercut the October lows by a full 10%, this divergence, similar to the momentum observed in 1987, shows that things were improving under the surface even if the price of the index didn’t yet reflect it.
It may be too early to say the initial leg of our current decline is done, but certainly we have seen an extreme historic decline in markets. Randy Eveland, Wealth Advisor for Covenant Wealth Strategies states, "We are cautiously optimistic about a potential bottoming pattern taking place as fewer individual stocks are at their 52 week lows despite a low in the index on Monday. Current momentum indicators also show that stocks are firmly in oversold territory. As this particular piece shows, markets can retest lows before ultimately making a move higher. We are continuing to monitor underlying factors such as momentum, volume, and the breadth of participation in market moves as we make investment decisions."
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This Research material was prepared by LPL Financial, LLC.