Wild week may just be a bump in the bull run
New York • It's really not so bad.
Investors decided that the stock market has suffered enough, at least for now. After a two-day plunge, stocks ended slightly down for the week but with an advance on Friday, the Dow up about 40 points.
Sure, the stock markets have declined nearly 5 percent since May 21, the day before the Federal Reserve first said it could begin pulling back its economic stimulus.
Yet taking a step back, the sell-off could ultimately represent nothing more than a hiccup. The market is in the midst of a historic bull run that began in March 2009, and it has endured sharper declines several times since the rally began. Every time, stocks have recovered.
Investors have reason to feel confident stocks can bounce back yet again. The economy is gradually improving and corporate earnings are setting records. Those factors drive stocks higher.
"It's just a bump along the road, and these levels represent a buying opportunity," said Peter Cardillo, Chief Market Economist at Rockwell Global Capital. "By the end of the year we will be much higher."
The 4.6 percent sell-off from the S&P 500's May 21 record close of 1,669.16 doesn't even qualify as a pullback defined as a slump from peak to trough of 5 percent to 9 percent.
Since bottoming out at a low of 676.53 after the financial crisis, the S&P 500 index has climbed 135 percent. During that stretch it had six pullbacks and two corrections losses of 10 percent or greater. The index has yet to slip into a bear market, a drop of 20 percent or more.
The first big wobble in the rally started April 23, 2010, when concerns about the European debt crisis unsettled investors. By July 2, the S&P 500 index had fallen 194.70 points, or 15.9 percent, to 1,022.58.
The next big interruption to the stock market's rise came a year later when the index fell by 245.79 points, or 18.3 percent, between July 22 and October 3, 2011. The catalyst was a tussle between U.S. lawmakers in Washington over extending the debt ceiling. The fight threatened to push the U.S. into default. Investors dumped stocks.
The most recent slump came in the run-up to the November presidential election, when investors worried about the threat of fiscal stalemate and the potential for political gridlock in Washington.
But once investors ultimately learned to live with the discord in Washington, the market resumed its upward surge, climbing almost without interruption to its most recent peak last month. Between Nov. 15 and May 21, the S&P 500 index gained 316 points, or 23 percent.
"If you look at the grand scale of where we've come this year, this really is a hiccup," said JJ Kinahan, chief derivatives strategist at TD Ameritrade of this week's selloff.
Typically, a pullback in stocks lasts about one month from peak to trough, said Sam Stovall, chief equity strategist at S&P Capital IQ, who has studied the S&P 500 going back to 1946. The stock market then takes about two months to recoup its losses. That suggests that a buy-and-hold strategy and a willingness to sit out rough patches favor long-term investors.
"History usually says that you're much better off buying than bailing," Stovall said.