The S&P 500 index has now dropped 11 percent from its May 20 record high. So stocks are a buy, right? Not necessarily.
Even after Monday's sharp drop, the market's price-earnings ratio totaled 16.8, 7 percent above its 10-year average of 15.7, according to FactSet Research. That doesn't exactly inspire great confidence in a market rebound.
“When we are this high, even with this pullback, the track record of future returns isn’t all that good,” Nicholas Colas, chief market strategist at institutional brokerage firm Convergex,
told The New York Times.
“The last two days have been a wakeup call for a lot of portfolio managers. It forces everyone to reconsider their base assumption for things like earnings growth and revenue growth.”
As of Aug. 6, 56 companies in the S&P 500 had issued negative earnings guidance for the third quarter, while only 22 had issued positive guidance, according to FactSet.
The S&P 500 index finally closed 10 percent beneath its record high Monday, breaking its 46-month streak of no 10-percent corrections.
That was the fifth longest correction-free streak ever. "And if history is any guide, that means there is a good chance that a 20 percent bear-market selloff is coming,"
writes Tomi Kilgore of MarketWatch.
The S&P 500 closed at 1,893.21 Monday 11.3 percent below its May 20 record of 2,134.72. The index stood at 1,897 Wednesday morning.
Of the four other correction-free periods longer than 36 months, three ended with declines of more than 20 percent, Gail Dudack, chief investment strategist at Dudack Research Group, told MarketWatch. Those periods encompassed 1966, 1987, 1997 and 2007.
Only the 1997 drop, sparked by the devaluation of the Thai baht, failed to reach 20 percent, bottoming out at 10.8 percent.
Federal Reserve tightening ended the party in the other three instances. The 2007 decline presaged the financial crisis of 2008. On Oct. 19, 1987, the Dow Jones Industrial Average fell 23 percent.
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