When stocks hit a rough patch, the amount of time they take to fully recoup those losses can provide a valuable hint as to how healthy the market truly is.
Which is why recent findings from The Leuthold Group paint such a stark picture for US equities right now as they struggle to claw back from a 10% correction that bottomed out in early February.
It’s been 61 days since the benchmark S&P 500 experienced those 2018 lows, the third-longest recovery time on record dating back to 1950, according to Leuthold data. And as you can see in this chart, it still has a ways to climb before the loss is completely erased.
This is troubling because, as Leuthold puts it, the probability of market “morbidity” increases rapidly the longer a correction lingers. The firm also highlights some haunting precedents that should have stock investors on edge.
Leuthold finds that in 2000 and 2007 — when the S&P 500 was battling back from corrections similar to the one facing stocks right now — the index reached its bull market highs within days after recouping the entirety of its losses. Then it was all downhill from there.
And while the firm itself recognizes these are cherry-picked examples, they still serve to show that correction recoveries can be so-called “bull traps.” In other words, as traders pile back in, there’s always the risk that they’ll have the rug pulled out from under them once again.
Another concern outlined by Leuthold is the propensity of the market to factor in corporate and economic developments six to nine months before stock indexes do. The firm argues we saw this last year, when the market underwent a “mini melt-up” that corresponded with the positive fundamental drivers we’re seeing now.
By this logic, stocks could still be in trouble, even if external conditions look promising.
“The market’s 2018 struggles imply that an important disappointment in the economy might be apparent by the fall,” Doug Ramsey, Leuthold’s chief investment officer, wrote in a client note.
“First quarter profits have been terrific, and this quarter’s will be too,” Ramsey continued. “Enjoy them, but remember the market ‘paid’ you for them many months ago. Don’t submit another invoice…”
With all of this in mind, it’s important to note that Leuthold is not calling for the outright end of the bull market. Rather, the firm is raising intriguing points about the stability of the market’s impressive nine-year run and reiterating what experts have been saying for months: Enjoy the rally while it lasts, but be prepared for it to all come crashing down.
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