Any stock market corrections we’ve had throughout the last year have been mild. Well, that’s not entirely accurate. It’s just that, in retrospect, it feels like we slept through them.
Within the last twelve months, the S&P 500 has been down nearly 10 percent once (September 2020) and down between nearly 4 percent to 8 percent a half dozen times. At the time, those gyrations didn’t feel mild to some people. However, those pullbacks have been forgotten by even some who felt anxious then. It would not be a stretch to suggest that we’re “due” for something bigger.
Suppose you argue that we’re due another 10 percent drop. Sure, I’ll buy that. A 10 percent correction happens to the stock market regularly. According to Charles Schwab, for the two decades before the pandemic (from 2000–2019), a decline of at least 10 percent occurred in 11 out of 20 years, or 55 percent of the time. The average pullback was 15 percent. (In two additional years, the decline was just short of 10 percent. If you include those, a 10 percent drop occurs once about every year-and-a-half, on average).
However, stocks rose in three-quarters of those years from 2000–2019 and had an average gain of about 6 percent, despite those pullbacks.
(According to JP Morgan, Since World War II, there have been 26 corrections of at least 10 percent before the pullback. The average decline was 13.7 percent over four months. I don’t stretch out that timeline to confuse the data. Sometimes recent numbers don’t always jibe with older numbers. But in this case, older numbers validate more recent information.)
If I am right, the stock market will correct, and, well, who cares? It’ll be a buying opportunity.
I suppose if the stock market went down, say, 30 percent, it would be a better buying opportunity, right? Maybe after the dust settles, but I don’t want any part of that. There is a big difference between a 15 percent drop over four months and suffering through a bear market. Four months seems like a long time, and it is. But, boy, it’s hard to get in and get out at the right moments to deliver a lot of extra return. It’s above my skill set. Study after study from the likes of Dalbar and MorningStar reveal that it’s a losing bet to even try.
But bear markets? Well, you’ve got much more time to get defensive and try to protect portfolios. According to Goldman Sachs, there were twelve bear markets between World War II and the start of the coronavirus pandemic. (A bear market is an instance when the stock market dropped at least 20 percent.) The average decline of a bear market was 32.5 percent over fourteen months. The stock market took two years to recover from a bear.
You can see why I spend a lot of time inspecting corrections to gauge the likelihood of them rolling over into bear markets. I suspect the next pullback will be painful as we go through it but will be relatively mild and forgotten almost as quickly as it happened. Or, to say it another way, sure, we’re “due” another 10 percent correction, but I do not expect a bear market this year. We can thank payroll growth for that expectation.
The U.S. employment rate for July was about as good it gets. Payrolls increased by nearly 1 million jobs, confirming the strength of the economy. After revisions to the May and June reports, year-to-date 2021, monthly job growth is about 600,000. Still, the economy is 5.7 million jobs behind where it was pre-COVID-19. If the year-to-date pace continues, the economy will replace those 5.7 million jobs by next summer 2022.
Although it could take a year to get back those jobs, the size of the economy has fully recovered. Gross Domestic Product (GDP) attained its pre-pandemic recession level in March 2021. GDP growth generally leads to job creation, particularly out of recessions. That doesn’t guarantee 600,000 jobs per month for the following year. But I wouldn’t be surprised if it wasn’t more. Yeah, that’s right — more than 600,000 jobs per month.
I know what you’re thinking — I’ve become one of “those guys.” You know who I mean. One of those guys who say a pullback is a buying opportunity. (Apparently guilty, at least partly.) Or one of those guys who think that the trend will remain in place just because things look good. That’s lazy forecasting and too often an easy way for perma-bulls to stay bullish. I say all that not to put down anybody who invests based on momentum (you can make a lot of money doing that). But if you’re going to read my column and possibly take my advice, you deserve to know that I’m self-aware.
The unemployment rate dropped from 5.9 percent to 5.4 percent last month. The unemployment rate is dictated by moving parts, like who is actually looking for a job, so you can’t just say X-number of new jobs will put the U.S. economy at y-percent of unemployment. Nonetheless, I don’t think I’m crazy to believe the unemployment rate could get back to 3.5 percent, the rate in February 2020. But let’s say we split the difference and go from 5.4 percent to 4.5 percent. It’s difficult for me to believe that we slip back into a bear market in that environment.
You may wonder how I could possibly believe so many jobs could be created in the course of a year. I’ll skip the details of the setup (wage growth, improved worker flexibility, return to school providing child care) and jump right to the punchline: JOLTS. Last week, the Bureau of Labor Statistics released its Job Openings and Labor Turnover Survey (JOLTS) report. The report found that the number of job openings reached a series high of 10.1 million available jobs on the last business day of June 2021. That compares to 8.7 million unemployed Americans.
There are enough job openings and workers to hire 600,000 people per month for the following year, theoretically. That level feels a bit aggressive to me. Something like 300,000+ seems like a more reasonable expectation. That’s still a lot.
I hate to add to what already makes me seem overly optimistic, but I will. Corporate earnings are great; even if the Fed starts to taper its bond purchases in 2021, monetary policy remains accommodative; investors still have cash on the sidelines; there is the potential for more fiscal stimulus through an infrastructure bill.
I suppose the stock market could go from bull to bear when all of this is happening. After all, there is a lot to worry about, including elevated stock valuations, high levels of optimism (a contrarian signal), peak everything (making comparison appear weaker), and the COVID-19 Delta variant. Although I’m not going to enjoy going through whatever correction will come, I’m going to bet on the durability of this rally as opposed to slipping back into a bear market.
This article originally appeared in The Berkshire Edge on August 16, 2021.