Is it different this time? Or is the nearly 10% year to date decline in the S&P 500 (SPX) soon to be a great buying opportunity, as has been the case for the last 5 years? The answer is likely a function of your dry powder and time horizon. Since the SPX’s 20% peak to trough decline in the second half of 2011 (during the European Soverign Debt crisis) every pullback has been a quick money making opportunity:
Will it be the same this time around? Or will the nearly 10% year to date decline in the SPX (13% from the all time highs in May) turn into a protracted bear market like the one from the dotcom bubble high in March of 2000 to its lows in October 2002. During that period, the index get cut in half, with three consecutive annual declines, with the worst being the last (SPX was down ~10% in 2000, ~12% in 2001 and ~22% in 2002):
Or will the nearly 10% year to date decline in the SPX turn into a full on crash like the one that took place in 2008, where the index had a peak to trough decline of 57% from its November 2007 high to its March 2009 low (with the index having its only down year since 2002 in 2008 with a decline of 38%):
I don’t know exactly how this will play out. What I do know is this, the SPX got cut in half in two instances since 2000, but for very different reasons, that caused very different types of selloffs. But every major correction doesn’t have to be as extreme. For those that think this sell-off turns into something more serious, first consider the 2011 correction of 20% from the highs as a more distinct possibility given the similarity in causes for the current weakness.
But the problem with looking at the past for a road map for the future is that the current economic backdrop has never been similar to anything in the past. The inter-connectivity of the global economy, years of zero or negative interest rates globally, the expansion of central bank balance sheets, at eye-popping levels of global gdp and the leverage in risk assets is quite unique. Assuming we aren’t near a rip back to the prior highs, then I can assure you that it will be very different this time. So maybe trying to compartmentalize a specific correction from the past to give a specific guide to how this one plays out isn’t particularly useful.
Your time is better spent re-evaluating your risk parameters.