The stock market surged to new heights this week, with the S&P 500 notching an impressive intraday peak of 6,764.58 on Thursday. The index closed at 6,753.72 on Wednesday but experienced a notable decline of 2.7% on Friday, despite maintaining an 11.4% increase year-to-date.
Market analysts have recently raised alarms, with many financial experts, including bank CEOs, predicting potential declines ranging from 5% to 15% in the near future. However, the classification of these forecasts as “bearish” is subjective. While most would categorize any prediction of declines as such, some argue that it’s merely realistic, especially when considering the historical patterns of drawdowns.
As illustrated in JPMorgan’s Guide to the Markets, the S&P 500 has historically seen an average intra-year maximum drawdown of approximately 14%. Interestingly, many years marked by significant dips have culminated in overall market gains. This leads to the viewpoint that expecting some volatility doesn’t equate to a bearish outlook—rather, it’s a hallmark of a cautious yet optimistic long-term investment strategy.
For long-term investors, the definitions of “bearish” and “bullish” can be nuanced. A bearish stance is typically associated with the expectation of descending prices, potentially dropping by 20% or more, while a bullish stance looks for climbing prices with occasional pullbacks. Although a drawdown of about 14% may seem alarming, it is a reality that many long-term investors face, particularly given the increasing odds of bear markets over longer holding periods.
As discussions on market performance continue, several key economic indicators deserve attention. A government shutdown has led to a halt in economic data releases from pivotal agencies like the Census Bureau and the Bureau of Labor Statistics, prompting a reliance on private data sources.
Inflation expectations have shown some upward movement, with median inflation expectations rising to 3.4% for the one-year horizon, while labor market sentiment has also shifted negatively. Reports indicate a dip in one-year earnings growth expectations and an increase in the perceived probability of unemployment.
Despite these concerns, consumer spending data reveals resilience. Card spending has been on the rise, with increases noted in travel and electronics. However, there remains a contradiction between robust consumer spending and deteriorating consumer sentiment levels, suggesting a complex economic landscape.
In the housing market, mortgage rates have slightly decreased, potentially spurring homebuying activity, although overall mortgage applications have seen a slight decline due to the stabilization of rates. Meanwhile, supply chain pressures have relaxed from previously heightened levels, indicating improvements in this area.
Current geopolitical uncertainties, including ongoing tariff discussions, have added layers of complexity to the economic outlook for businesses and investors alike. Market analysts maintain a positive long-term perspective driven by favorable earnings growth expectations, even as they caution investors about short-term volatility stemming from political or economic disruptions.
Though challenges are expected in the investment landscape, historical data suggests that markets tend to recover over time. Maintaining a long-term focus is essential for investors aiming to navigate the inherent volatility within stock markets. Educators and analysts emphasize the significance of understanding the cyclical nature of the market, preparing investors for both the highs and lows in their financial journeys.
