Is It Time For A 5% Pullback?

Some Normal Volatility May Be Welcome

A year ago yesterday marked the first new all-time closing high for the S&P 500 Index in nearly 14 months. As we noted at the time, that first new high after at least a year can kick off a strong period of outperformance for equities. Sure enough, the S&P 500 has made 42 new highs and is up 14% over the past year.

But, the amazing performance over the past twelve months doesn’t stop there as the index incredibly hasn’t pulled back at least 5% (on a closing basis) over that period. Per Ryan Detrick, Senior Market Strategist, “This is only the sixth time since 1950 that the S&P 500 has made it at least a year without so much as a 5% correction, and marks the longest streak since 1995. The reality is that earnings are strong, inflation is low, the Fed is accommodative, and valuations aren’t excessive when you factor in the historically low rates ―which all suggest the bull market has legs. But all of that doesn’t mean gravity won’t eventually take over. A well-deserved 5% correction could take place at any time, if for no other reason than it has been a year since the last 5% correction.”

As the graph below shows, the current streak started right after the Brexit vote ―the S&P 500 gained 19.1% during this period of tranquility. The longest streak, however, was nearly 20 months (December 1994 to July 1996) when the index ran up more than 40%!

Last, as we noted in 2017 So Far, besides being a historically calm bull market, the maximum drawdown in the S&P 500 year to date has only been 2.8%. Should the year end right now, this would be the second smallest pullback during a year ever―with 1995 experiencing the smallest intra-year correction at 2.5%.

Of course, there is still plenty of time left in 2017, and the odds do favor a potentially larger pullback sometime later this year. Per Ryan Detrick, “To put things in perspective, going back to 1950, the average intra-year correction for the S&P 500 has been 13.6%, and 91% of all years have had at least a 5% correction, while nearly 54% of all years pulled back at least 10%. In other words, history suggests we’ll likely see that 5% correction before the year is over.”

The good news though, as we discussed in our Midyear Outlook 2017, is that any equity weakness should be used as a buying opportunity, as the odds of a major bear market or recession starting soon are extremely low.

Source: LPL Research

 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Stock investing involves risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC
Tracking # 1-624879 (Exp. 6/18)

Banks Pass Second Stress Test

Positive Test Allows Banks to Pay Dividends and Purchase Stock

Yellen

You may have noticed your news alerts flood your feed with notifications of big banks announcing dividend hikes and share buybacks.  This is a result of all 34 banks passing the second round of the Fed stress test.  The Fed tests a bank’s capital plans to determine if it could withstand a severe economic downturn.  Once the announcement was made that all 34 banks had passed their tests, many banks released their plans to increase their dividends and/or engage in share buybacks.

Generally speaking, companies increase dividends and purchase their own shares when they are feeling confident about their company.  Once Fed stress test revealed that most banks had more than enough capital on hands to withstand the level of economic downturn modeled in the test, the all clear was given for banks to return capital to their shareholders.  Now it will be up to the buyers and sellers of the market to analyze this news

Now it will be up to the buyers and sellers of the market to analyze this news and determine where the price of bank stocks will go.

This is not a recommendation to buy or sell securities. 

Banks Pass 1st Round of Stress Test

big bank

The Fed Releases Results for First Round of Stress Test

As a result of the financial crisis, regulators placed greater restrictions on banks.  Each year the Fed initiates a “Stress Test” to determine the financial health of United States banks.  The Banks are assessed on how they handle a severe economic downturn.  This year the Fed modeled a grim economic situation – a 10% unemployment rate, a steep decline in housing prices, and a severe recession in the Eurozone.

On Thursday, June 22, 2017, the Fed announced all 34 banks measured passed the economic stress test.  Each year, the Fed changes the test in order to prevent banks from being able to trick the system.  If a bank does not pass the test, it is disallowed to pay out dividends until approved by regulators – a hefty punishment for stockholders.

In summary, the results showed that capital plans for banks are sufficient to continue lending, even during a severe economic downturn.  Stay tuned for more news.

Midyear 2017 Outlook

MidyearLPL researchers have released their Midyear 2017 Outlook.  Highlights include an overview of where four market drivers stand:

  1. Monetary policy
  2. Business fundamentals
  3. Economic growth
  4. Fiscal policy

The report also includes the themes that the LPL research team will be watching in the second half of 2017.

Take a look at the report and reach out to the Granite Wealth team if you’d like to discuss.

LPL Midyear Outlook 2017

Happy Fiduciary Day

GWM is Prepared for the New Rule!

cropped-cropped-rsz_granite_cmyk-300dpi_logo11.jpg

You may or may not have heard in the news of the new Department of Labor Rule taking place today June 9th, 2017.  In short, the DOL created a rule announcing tha all advisors who give investment advice must be Fiduciaries.  A fiduciary, by definition, is someone who is “one often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation.”

This means that an advisor giving financial advice must act in the best interest of his or her clients.  Here at Granite Wealth Management, we are excited about this new rule because it now solidifies our core principals.  As an independent financial advisor, we take pride in being able to offer objective advice that is in the best interests of our clients. The most important step in this process is to have a deep understanding of our client’s goals, experiences, and risk tolerance.   Our clients can feel confident knowing their advisor team has been taking a proactive approach to ensure we act in our clients best interest.  Our investment due diligence, our internal processes, and our objective advice are all designed to support our clients best interest.

The GWM is excited and prepared for this new rule.  If you would like to hear more, please contact the office and we will be glad to share our process with you.

Contact: Kyle Crawford at (209) 846-0744, or email kyle@granitewealthllc.com