The last time we saw a significant correction in the U.S. stock market was in early 2016. We are now coming up on the two year anniversary of a move in the equities that have taken the major averages to lofty levels and a succession of record highs.
Asian contagion caused the S&P 500 index to fall over 13 percent from the end of 2015 through the week of February 8, 2016. The days of double-digit economic growth in China came to an end, and the Chinese domestic stock market plunged. Stocks moved lower around the world in sympathy with the Chinese market.
When the Chinese economy catches a cold, the rest of the world tends to get a severe case of the flu.
As the weekly chart of the E-Mini S&P 500 futures contract illustrates, the correction took the index from 2,075 during the final week of 2015 to lows of 1802.50 in early 2016. Since then, with a few minor exceptions, the index has been nothing short of a bullish rocket ship. However, on a longer-term basis, stocks have been explosive the lows following the global financial crisis of 2008.
As the quarterly chart highlights, in October 2009 the S&P 500 found a bottom at 665.75. As of Friday, January 12, 2018, it was above 2775 more than quadrupled the value in less than a decade. The most recent leg up in stocks makes the early 2016 price action seem like a speed bump on the way to the current level. Since October 2015, the index has moved to the upside for nine consecutive quarters.
The stock market picked up steam after the election of President Donald Trump. Fewer regulations, lower corporate taxes, and a business-friendly environment in the United States has fueled the rally. Moreover, global economic data indicate that economic growth is accelerating. In the U.S. GDP is growing at over 3% and unemployment at 4.1% is at a low. In Europe, moderate economic growth has replaced years of malaise. At the same time, China’s economy is looking good these days. The recent Party Congress put President Xi in the most influential position for a leader of the world’s most populous nation since Mao Tse Tung.
Meanwhile, the trend remains higher in stocks, but there are warning signals on the horizon for 2018. The geopolitical landscape in the Middle East and Korean Peninsula are a minefield of potential problems that could cause periods of risk-off action in stocks over coming months. The valuation of the S&P 500 is at the second-highest level in history; almost 34 times earnings. Eventually, gravity will hit the loft stock market, and 2018 could be a year where trading, rather than passive investing in stocks could prove the optimal strategy.