At the time of this writing, the S&P 500 is down about 5.5% for the year and about 10% below its all-time high in late February. Thus far, the market pullback has been a “garden variety” drawdown; the 26th such decline of 5% or more since the March 2009 low following the Great Financial Crisis of 2008/2009.
The past declines lasted an average of 26 days, with the longest declines lasting more than 250 days in 2015/2016 and 2022 respectively (see chart above). This drawdown has been driven mostly by uncertainty around tariffs which we believe could materialize into one of the longer-lasting drawdowns given the rhetoric around global trade and the heightened possibility of a retaliatory trade war.
Regardless of the reason, drawdowns aren’t uncommon. The S&P 500 has been below its all-time high in 92% of all trading days since 1950 as evidenced by the chart below. In other words, most of the time, the market is below a previous high point.
So, what’s the plan going forward?
Years ago, we (Raanes and Oliver Capital Advisors) adopted a rules-based strategy to manage risk. Rather than be swayed by a convincing article or a well-spoken analyst, we closely watch moving averages to time our allocation decisions. See the chart below.
The smooth blue line is the 200-day moving average price of stocks in the S&P 500. The choppy black line is the 5-day average price of stocks. When the black line (5-day moving average) crosses below the blue line (200-day moving average) we automatically reduce the stock allocation in discretionarily managed accounts. The specifics vary by client, but the goal is to reduce the impact of a drawdown.
Using moving averages as a trigger to change our allocation gives us a defined line in the sand and removes our hunches or feelings about the market direction.
Ultimately, earnings (and the perception of future earnings) drive stock performance. The recent earnings numbers have been pretty solid for the broad market, but investors are struggling with the uncertain impact of tariffs, coupled with the possibility of an escalated trade war, which could lead to an economic slowdown.
For now, we will proceed with the assumption that this drawdown won’t escalate into a bear market, but we’ve taken measures regardless to help reduce risk in the near term.
Please feel free to reach out with questions or concerns. As always, we sincerely appreciate your continued confidence and trust!
Any opinions are those of Brady Raanes and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.
The investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.
The 5-day simple moving average (SMA) is a trendline that represents the daily plotting of closing prices for a stock, averaged over the past 5 days. It is used by traders as an effective trend indicator. The 200-day simple moving average (SMA) is considered a key indicator by traders and market analysts for determining overall long-term market trends. It is calculated by plotting the average price over the past 200 days. The RSI (Relative Strength Index) is a momentum oscillator that measures the speed and magnitude of a security's recent price changes to detect overbought or oversold conditions. It is displayed as an oscillator on a scale of zero to 100. The Exponential Moving Average (EMA) is a type of moving average that places greater weight and significance on the most recent data points. This makes it more responsive to new information compared to the Simple Moving Average (SMA), which applies equal weight to all observations in the period.