The market sell-off that began on September 21 has intensified in recent days, and we’re on the cusp of a second 10% correction in 2018. While headwinds are building for the U.S. economy, there are a number of reasons why we don’t see a recession around the corner.
This level of volatility is actually quite normal for a bull market, but it’s understandably nerve-rattling after 2017’s eerily calm rise in asset prices. Since 2009, the S&P 500 Index has experienced a drop of 5.0% or more 22 other times, with an average decline in those periods of –9.3%.1 A decline of the magnitude we’ve seen in the past two months tells us that investors are starting to price in the next recession (after a nine-year expansion, it’s about time, right?). Here are four reasons why we believe they’re too early:
1. Leading economic indicators remain strong
2. Jobless claims are at historic lows
3. PMI data points to continued growth
4. Consumer confidence remains near its high for the cycle
Because investors are pricing in slower growth, cyclical sectors such as financials, energy, industrials, and materials have been particularly punished in 2018. However, it’s important to note that several sectors have held up quite well, especially parts of the market that offer a combination of growth and defense. Healthcare is an area we’ve favored in 2018 (tailwinds include positive demographic trends, durability of earnings, and growth at a reasonable price). While it doesn’t feel like it after the past few weeks, the technology and consumer discretionary sectors also remain in positive territory so far this year; purely defensive sectors such as utilities and real estate investment trusts (REITs) are also catching a bid. Overall, five sectors are positive and six are negative for the year, so there have been plenty of places to find refuge.
Some sectors have offered refuge from the storm
In our view, the recent equity market sell-off is likely overdone, and this correction should provide a buying opportunity, as most corrections do outside of recessionary periods. Seasonality may also provide a tailwind here, as investors historically turn more optimistic at the end of the year—particularly in midterm election years. Bottom line: This bull market still has legs.
1 Standard & Poor's, 2018.
The S&P 500 Index is an unmanaged index that includes 500 widely traded common stocks. It is not possible to invest directly in an index.
The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector based on five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment.
Views are those of Emily R. Roland, CIMA, Head of Capital Markets Research, and Matthew D. Miskin, CFA, market strategist for John Hancock Investment Management, and are subject to change. No forecasts are guaranteed, and past performance does not guarantee future results.. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. This material does not constitute tax, legal or accounting advice and neither John Hancock nor any of its agents, employees or registered representatives are in the business of offering such advice. Please consult your personal tax adviser for information about your individual situation.