- Wells Fargo examined the stock-market downturns that have occurred since 1950 and found three instances in which the sell-off then resembled the sell-off now.
- The S&P 500 posted declines of 20% or more during the strong economies of 1962, 1966, and 1987.
- After each of these instances, the bank found, the stock market posted new highs within two years – without a recession.
- “The sample size is obviously small, and the world today is very different from the 1960s and 1987,” strategist Pravit Chintawongvanich told clients. “But these are useful historical examples showing that the market can correct when the economy is strong, without portending a recession.”
Stocks have sold off sharply from their all-time highs earlier this year as rising interest rates, fears around slowing global growth, and the looming uncertainty of the US-China trade war have all hit the market.
Now, the S&P 500 is down 17% from its all-time high on September 21 and 10% since the start of this year.
Wells Fargo crunched the numbers on over six decades of significant S&P 500 drawdowns, and found the current market environment – wherein stocks are selling off but the economy is expanding – looks like the sell-offs in 1962, 1966, and 1987. Those years, stocks lost 28%, 22%, and 36% respectively from peak to trough.
Investors may be able to find solace in the results. The bank discovered that after each of these instances, stocks recovered and made new all-time highs within two years – without the economy entering a recession.
Following those three periods of stock-market downturns, the S&P 500 posted double-digit gains, according to a Business Insider analysis.
- After its June 1962 low, the S&P 500 climbed 42% to a new high in August 1963.
- After its October 1966 low, the S&P 500 rallied 32% to a new high in April 1967.
- After its October 1987 low, the S&P 500 soared 58% to an all-time high in July 1989.
“The sample size is obviously small, and the world today is very different from the 1960s and 1987,” Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo, told clients in his note on Thursday. “But these are useful historical examples showing that the market can correct when the economy is strong, without portending a recession.”
Of course, most of the market’s drawdowns going back to 1950 did occur during recessions, particularly the most serious ones, which involved big events like the high inflation of the 1970s and early 1980s, the global financial crisis in 2008, and the dot-com crash of 2000. However, Chintawongvanich and his team were more interested in the non-recession selloffs since it does not appear the US economy is heading into a recession anytime soon.
After all, the US unemployment rate is sitting at 49-year low of 3.7%, corporate earnings are growing, and Wells Fargo does not characterize the current US-China trade war as a global-macro event of historical precedent.
In 1962, 1966, and 1987, specifically, the US was strong and inflation was relatively contained, as it is today.
Below is the table Wells Fargo put together, examining the 20-largest drawdowns in the S&P 500 since 1950, comparing their respective peaks and troughs, volatility, and some economic indicators.
- Wells Fargo
Wells Fargo noted other similarities between this year and the prior three instances of “strong economy selloffs.”
In 1966 and 1987, as is the case this year, the Federal Reserve was in the midst of tightening monetary policy, and there was some “executive branch uncertainty” in 1962 as some attribute that year’s selloff to President John F. Kennedy’s public inquiry into steel companies’ price increases.
The current decline has come fast and furious, in 97 days ending today (compared with the lengthier selloffs in the 1960s).
“The 1962 selloff in particular has some resemblance to today in that prices slid lower for over a month, instead of rapidly crashing to the lows as we have grown accustomed to in this cycle,” Chintawongvanich wrote.