When Will We See A Correction In The S&P 500?

The S&P 500 (SPY) has been on the up and up over the last five years, only stopping for a breath every now and then. Since April 2010 it’s up 73% and anything that could be considered a downturn (even the big cycles are made up of mini cycles) has only lasted a month or two. It’s not surprising then to see that the index is nearing another all-time high (how many have we reached since the financial crisis?)

The S&P 500 has actually slowed down a little over the last month, only rising 1.17%. Still, there’s been a 5% upwards movement in the last three months and some analysts are surprised that the market is still seeing such enthusiasm.

What about that correction?

With any bull market, you’re going to have naysayers just waiting for a market correction. In fact, one expert said in an interview with CNBC that this could be the most hated bull market in history. And it’s hard to blame the haters. After all, the tech industry has been a huge driver of growth in recent years, causing some to wonder whether we learned our lesson after the dot com bubble burst in the late 90s.

Additionally, if you take a look at how the market has cycled since the dot com bubble burst, you’ll see the market peaked around January 2000 before finishing its nosedive in July 2002, then peaking again in July 2007 before bottoming out in January 2009. That’s about seven years between each peak and valley. If the market were behaving like it has over the last 15 years then we should have seen the market peak last year.

So is it a ticking time bomb? Or do we have reason to believe things are different this time?

Reasons to be positive

One thing to consider when thinking about the cyclical movement of the market is something shared by Seeking Alpha contributor Brian Gilmartin:

People forget that prior to the three-year period of consecutive negative returns of 2000, 2001, and 2002, the last time the S&P 500 experienced even two years of negative returns was the 1973-1974 bear market. Prior to the 1973-1974 bear market, the last time the S&P 500 experienced 2 consecutive years of negative returns was 1940-1941.

So yes, the 2000s were a rough decade, but those two events so close to each other were the exception, not the norm. Based on what Gilmartin wrote, the norm would be closer to 30 years that we would see a bear market that lasts at least two consecutive years.

One other thing Gilmartin shared that is of note is how the current market is made up. According to his analysis, Technology and Finance make up about 35% of the current market cap of the S&P 500. In 2000, Technology made up 33% of the market cap, and in mid-2007 Finance made up 30%. So even if you think the tech industry bubble is going to pop anytime (the likelihood is much slimmer this time around, by the way), it won’t have anywhere near the effect it did after the dot com era.

Conclusion

I don’t blame investors for being skittish after going through hell twice in the last two decades. But if you try to see the forest through the trees, you can see that things probably aren’t as bad as you think? Will there be a minor correction sometime soon? Possibly. But it’s unlikely you’re going to see anything as drastic as what we’ve seen in the previous two recessions.