Stock Market Valuations Suggest That This Bull Market Still Has Teeth

August 4th Weekly Market Update

After hitting another all-time high on July 24, the S&P 500 Index fell for six consecutive trading days, leading to a 2.7% drop for stocks for the week ending August 1, 2014. Losing under 3% in a week seems a minor concern given historical market ups and downs, especially in the face of a strong bull market that has seen a 220% gain since the market’s low point in 2009. Nonetheless, investors may begin to wonder if stock market valuations are signaling a larger impending market decline and possibly even the end of this bull market cycle.

Part of the fear over last week’s sell-off is that investors have not been accustomed to drops in stock prices over the past two years. After all, it’s been a long while since we have seen a significant pullback. In fact, this week marks the third anniversary of the last 10% or greater correction in the S&P 500, which happened in the late summer of 2011 (July 22, 2011 – August 8, 2011). The catalyst at the time was the debt ceiling debacle in Congress and the resulting downgrade of the United States’ credit rating by Standard & Poor’s alongside the increased risk of a break-up of the Eurozone. The stock market fell 17% during this two-and-a-half week period (and dropped 19% peak to trough from the April 2011 high through the October 2011 low).

Three years seems like a very long time without a 10% correction, and frankly, it is. But it is not without precedent. Economic expansions periodically offer long stretches of remarkably low volatility and a preponderance of up days for stocks. Since the end of the last significant sell-off for stocks (October 3, 2011), the market has been in a pretty consistent upward trend. The result is that it has been 1033 days since the end of a period culminating in a double-digit drop for the S&P 500.

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