Market Musings 05/12/21:
Absorbing bumps on the stock market road
Recent podcasts you may care to listen to:
Recent reports you may wish to read:
Bull markets usually see 1+ corrections per year
Stock market corrections during a bull market are normal; usually, stock markets end up higher three or six months after a correction (of 5% or more).
Following all corrections of 5% or more (since 1990), European stocks have on average ended up 3% higher 3 months later, and 7% 6 months later, with positive performance about 2/3rds of the time.
However, if we exclude the 1990-93, 2000-03, 2007-09 and early 2020 economic recessions, then these stats improve sharply, to an average post-correction performance of 7% 3 months later, and 11% 6 months later.
So what stock market investors need to watch out for is the emergence of an economic recession. Then we can see wholesale loss of capital, as in the 2000-03 tech bust, the 2007-09 great financial crisis and the early 2020 COVID-19 crash when benchmark stock market indices lost 35%-50% from peak to trough..
The three charts below look at the three bull market periods in European stocks (using the STOXX Europe index as benchmark) outside of these recessionary periods: 1993-2000, 2003-2007 and 2009-2020.
European stocks over the last 3 bull market cycles
Source: BNP Paribas, STOXX
What we can see from the charts (drawn on a logarithmic basis to better see the rate of change over time) is that market corrections generally don’t last very long, and result in the resumption of the uptrend more often than not.
Only relatively rarely outside of economic recessions have we seen prolonged periods of under-performance in European stocks over the last 30 years - 1994-1995, late 1998-99, 2004, 2011-12, 2015-16 and late 2018-19.
So far, the current 5.6% drop from mid-November peak in the STOXX Europe index (only -3.5% for the FTSE 100 and the US S&P 500 indices) represents but a small bump in the upwards trajectory of stock markets.
Yet another bump on the road for European stocks?
Source: BNP Paribas, STOXX
