Santa vs. the Grinch is Heating Up as the Market Cools Down

The S&P 500 Index has been up and down over the last few weeks, eliminating gains made earlier this year. After a dip in late January and early February, the S&P was pulled higher through the second and third quarter by mostly tech stocks.

Note, the NASDAQ took off after the correction earlier this year and the S&P 500 followed suit. However, the New York Stock Exchange Composite Index spent most of the year hovering around flat. The Q2/Q3 rally was largely due to some of the largest companies posting solid returns (i.e. Amazon, Apple, Microsoft). Remember, the top 10 contributors to the S&P 500’s return through Q3 accounted for 54% of the return. The NYSE Composite Index is a great barometer for the overall health of the market. Unlike the S&P 500 Index, it does not include the large NASDAQ listed tech companies. 

The NYSE Composite is comprised of approximately 2,000 U.S. listed companies, including small, mid, large-cap, and ADRs. 

A few stats on the S&P 500:

  • About 300 stocks have a negative return for the year
  • 200 are down 10% or more
  • 100 are down 20% or more

It is safe to say the majority of stocks are nearing a bear market. Markets have been fragile since October for two reasons: the Fed’s desire to continue to raise rates, and weaker forecasts. 

The S&P 500 has trailing 12-month P/E of 21.3. If corporate fundamentals return to average then that could trigger a return to average P/E’s.

  • Long-term average P/E 15.8
  • Current P/E 21.3
  • Loss on reversion to mean -26%

If stocks slip into a bear market, the 2008 P/E was 10.9. That’s a loss of 49% from here. 

At WBI, we believe there is never a good time to lose half your capital. We use cash as a risk mitigation tool to protect and preserve capital in times of market stress. While we are hopeful Santa will deliver a year-end rally, we think investors need to be cautious of the Grinch stealing Christmas.

Important Information

Past performance does not guarantee future results. The views presented are those of Matt Schreiber, and should not be construed as investment advice. Matt Schreiber or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request. 

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.

Source: Bloomberg as of 12/7/2018

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