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Pullbacks Don’t Mean the
End of the Bull Market

October 21, 2014

Yesterday, I opened the Business Section of my Sunday newspaper to be hit with the headline “How Bad Can It Get? Some Wall Street pros are sounding an alarm: This could be much worse than a regular correction.

Of course, I’m well aware of the market movements of the past 30 days, but REALLY?

Please, let’s keep some perspective. Could October of 2014 be the beginning of another stock market and economic crash like that of 1929, 1987, or 2008? I suppose so, but I certainly don’t think so.

Because there seems to be an unusual amount of angst over the market volatility of the past four weeks, I thought it was timely to put my thoughts on paper and share them with you.

The S&P 500 extended its recent pullback last Friday (October 17th) to close down for the fourth consecutive week and is now 6.2% off its September 18th record close of 2011.36. This pullback has provided an unwelcomed reminder that stocks do not go up in a straight line Even within powerful bull markets such as the one we have been enjoying since 2009, pullbacks of 5 – 10% have been quite common, and in my opinion do not mean the bull market is nearing an end. Markets typically see four pullbacks of 5% or more in a year and this is the first since January/February of 2014.

Below, J.P. Morgan has created an excellent depiction of the movement of the market during the year and the corresponding outcome at year end.

At first glance, it may appear confusing, but spend a moment with it. The bars (mostly up – 26 of 34 years) represent the annual performance for the S&P 500 Index from 1980 through September 2014. The dots under the bars represent the maximum decline during the year. 2008 is a good example. At its worst point during the year, the S&P 500 dropped by 49%; however, for the year, it ended with a decline of only 38% (wow, that was much better! – sarcasm intended). Last year, 2013, the S&P 500 ended with a gain of 30%, but at one point during the year it dropped by 6%. During this 33 year period, the average intra-year decline was 14.4%. So, at this moment, with this information, a pullback of 6.2% doesn’t seem quite as horrifying as our headline writers my lead us to believe.

I also hear people throwing words around to describe this decline in the market. Some people clearly seem to think the choice of words is unimportant. I disagree, so let’s put some meat on the bones of these words.

Definition of a “Pullback”

A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum.

Definition of a “Correction”

A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.

Definition of “Bear Market”

A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market

Definition of “Stock Market Crash”

A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, economic crisis or the collapse of a long-term speculative bubble. Well-known U.S. stock market crashes include the market crash of 1929, Black Monday (1987), and the recession of 2008.

So, for the time-being, I’m sticking with the word “pullback.”

Pullbacks Do Not Mean, nor Signal, the End of the Bull Market

As I’ve emphasized, pullbacks are normal. Sometimes stocks just get ahead of themselves. When they do, investor concerns can be magnified and profit taking might take stocks down more than might be justified by the fundamental news.

My evaluation is this latest pullback is normal within the context of an ongoing and powerful bull market and do not see its causes (European and Chinese growth concerns, the rise of Islamic State militants, Ebola, the Russia-Ukraine conflict, etc.) as justifying something much bigger. I understand the nervousness out there, but what we have just experienced looks pretty normal to me at this point.

Maybe it is due to the challenges of “perspective.” When volatility has been so low for so long, normal volatility does not feel normal. Investors have become unaccustomed to what I would characterize as normal volatility. While most of the 6% drop came in a short period of time (October 6 –10), that level of volatility is not at all uncommon within an ongoing economic expansion and bull market. Volatility tends to pick up as the business cycle passes its midpoint, which I believe it has. Reaching this stage just took longer than many had expected during the current cycle.

Also, keep in mind that the 335 drop in the Dow Jones Industrials that we experienced on Thursday, October 9, 2014, is not as dramatic as it once was. That loss was less than 2%, with the Dow near 17,000 when it occurred, compared with 3 – 4% losses associated with that number of points on the Dow earlier in the recovery.

These pullbacks do not mean the end of the bull market is near, nor does the fact that we have not had a 10% or more correction since 2011. In fact, most bull markets since World War II included only one correction of 10% or more, and the current bull has already had two (2010 and 2011). I simply do not believe the current economic and financial market backdrop has sufficiently deteriorated for the pullback to turn into a bear market, as we discuss below.

Why This Pullback Is Unlikely to Get Much Worse

So why do I think this pullback is unlikely to turn into a bear market? There are a number of reasons:

  • · The economic backdrop in the United States remains healthy. Gross domestic product (GDP) is growing at a rate above its long-term average, providing support for continued earnings growth.
  • · The European Central Bank (ECB) is likely to add a dose of monetary stimulus to spark growth in Europe, the source of much of the global growth fears that have driven recent stock market weakness. China stands ready to invigorate its economy as well.
  • · Interest rates, and therefore borrowing costs for corporations, remain low. The Federal Reserve (Fed) is in no hurry to raise interest rates.
  • · The recent drop in oil and gasoline pump prices may support stronger consumer spending.
  • · Valuations have become more attractive. Price-to-earnings ratios (PE) have not reached levels that suggest the end of the bull market is forthcoming, based on history. I view PEs, which have fallen about 0.5 points from their recent peak, as reasonable given growing earnings and low interest rates.
  • · Although nowhere near 2008 levels, corporations, individuals, and institutions have a great deal of cash on the sidelines. I believe corporations will begin shifting a larger proportion of cash toward reinvesting in their businesses or more stock buybacks.
  • · The U.S. labor market has created 2 million jobs over the past year.
  • · The unemployment rate is 5.9%, according to the U.S. Commerce Department and the Bureau of Labor Statistics.
  • · New claims for unemployment fell to their lowest level in 14 years.
  • · Other economic and market indicators that have typically been good predictors of increased fragility of the economic cycle and potential market downturn may be signaling the continuation of the bull market.
  • · My favorite leading indicators, including the Conference Board’s Leading Economic Index (LEI), the Institute for Supply Management (ISM) Index, and the yield curve, suggest that the bull market may likely continue into 2015 and beyond, with a recession unlikely on the immediate horizon.
  • · The decline in bond yields in 2014 has lowered borrowing costs for corporations, which in turn lower expenses and help support profitability.

Bull Markets Don’t Die of Old Age

The current bull market is one of the most powerful ever at this stage, just over 5.5 years. Since March 9, 2009, when the current bull market began, the S&P 500 has risen 182% (if you include dividends, the total, cumulative return has been 217%), topping all other bull markets since World War II at this stage. The 1949 and 1982 bull markets were close, with gains of 170% and 163% (respectively) at this stage, but were not quite as strong.

So does that mean that this bull market is too old and should end? I don’t think so. Bull markets die of excesses, not old age, and I don’t see the excesses that characterize an impending bear market. The labor markets are not strong enough yet to generate significant upward pressure on wages to drive inflation. U.S. factories have excess capacity. As a result, the Fed is unlikely to start hiking interest rates until the middle of 2015, and rate hikes are likely to be gradual. It will likely take numerous hikes to slow the U.S. economy enough to tip it into recession (and invert the yield curve), which is unlikely to come until at least 2016. I do not see stock valuations or broad investor sentiment as excessive. I expect this bull market to complete its sixth year in March 2015 and believe there is a strong likelihood that it continues well beyond that date.


I do not believe the volatility seen in recent weeks, which is in-line with historical trends, is an early signal of a recession or bear market. Nor do I think the age of this bull market means it should end, given the favorable economic backdrop, central bank support, and reasonable valuations. Although I will continue to research and read the views of the many smart people in this industry, I think this latest bout of volatility is nothing more than a normal, though unwelcome, interruption within a long-term bull market. I maintain our positive outlook for stocks for the remainder of 2014 and into 2015.

We, at Guidant Wealth Advisors, remain committed to you our clients. I believe we have your investment portfolio positioned for future economic and stock market growth, but with a healthy balance of assets that can provide protection against volatility.

We also appreciate the opportunity to work with you and, and most importantly to help guide you in your financial lives and to help you accomplish your goals.

If you have questions or concerns please call.

Frank Patzke, President
Guidant Wealth Advisors


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth may not develop as predicted.

The S&P 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.

Indexes are unmanaged and cannot be invested into directly. The returns do not reflect fees, sales charges, or expenses. The results do not reflect any particular investment.

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